to notify the FAS prior to any increase in domestic prices of coking coal and coking coal concentrate, if such increase amounts to more than 10% of the relevant price used 180 days before the date such increase is planned to take place, with submission to the FAS of the financial and economic reasoning for the planned increase of prices.
In connection with the establishment of Mechel Mining, the subsidiary into which we consolidated certain of our mining assets, we received a directive from the FAS dated June 23, 2008, which contains requirements as to the activities of Mechel Mining and its subsidiaries Yakutugol and Southern Kuzbass Coal Company, as a group of companies holding a dominant position in the Russian coking coal market. The requirements are the same as those described above.
In August 2008, as a result of an antimonopoly investigation into the business of our subsidiaries Mechel Trading House, Southern Kuzbass Coal Company, Yakutugol and Mechel Trading, the FAS found them to have abused their dominant position in the Russian market for certain grades of coking coal concentrate. The FAS issued a directive requiring these subsidiaries and their successors to, among others, refrain from taking any action in the Russian market for certain grades of coking coal concentrate which would or may preclude, limit or
eliminate competition and/or violate third parties’ interests, including fixing and maintaining a monopolistically high or low price, refusing or avoiding to enter into an agreement with certain buyers without good economic or technological reasons where the production or supply of the relevant grades of coking coal concentrate is possible and creating discriminatory conditions for buyers. Furthermore, material fines were imposed on Mechel Trading House, Southern Kuzbass Coal Company and Yakutugol.
In the event of a breach of the terms of business conduct set forth by the FAS, the FAS may seek to impose fines for violations of antimonopoly and administrative legislation. Such fines may include an administrative fine of an amount from 300 thousandRUB 300,000 to oneRUB 1 million rubles or, if such violation has led or may lead to the prevention, limitation or elimination of competition, an administrative fine of up to 15% of the proceedsrevenue from sale of all goods, works and services in the market where such violation was committed, but not more than 2% of the aggregate amount of proceedstotal revenue from sale of all goods, works and services in case of abuse of a dominant position and not more than 4% of the aggregate amount of proceedstotal revenue from sale of all goods, works and services in case of conclusion of an inadmissible agreement according to the law. Russian legislation also provides for criminal liability for violations of antimonopoly legislation in certain cases. Furthermore, for systematic violations, a court may order, pursuant to a suit filed by the FAS, a compulsorysplit-up orspin-off of the violating company, and no affiliation can be preserved between the new entities established as result of such a mandatory reorganization. The imposition of any such liability on us or our subsidiaries could materially adversely affect our business, financial condition, results of operations and prospects.
In 2016 and 2017, the FAS conducted large-scale inspections of companies engaged in loading, unloading and storage of cargoes in ports of the Russian Federation concerning justification of applied tariffs for services. Based on the findings, a number of companies were found to have violated antimonopoly legislation in part of setting monopolistically high prices for services and were required to pay significant funds to the state budget.Our group companies which provide services of loading, unloading and storage of cargoes in ports were not subject to proceedings for violation of antimonopoly legislation in part of setting monopolistically high prices, however a possibility of new inspections remains. The FAS is also considering repeated introduction of government regulation of tariffs for services of loading, unloading and storage of cargoes in ports which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Negative publicity associated with any antimonopoly, administrative, criminal or other investigation or prosecution carried out with respect to our business practices, regardless of the outcome, could damage our reputation and result in a significant drop in the price of our shares and ADSs and could materially adversely affect our business, financial condition, results of operations and prospects.
In the event that the minority shareholders of our subsidiaries were to successfully challenge past interested party transactions or do not approve interested party transactions in the future, we could be limited in our operational flexibility.
We own less than 100% of the equity interests in some of our subsidiaries. In addition, certain of our wholly-owned subsidiaries have previously had other shareholders. We and our subsidiaries have carried out, and continue to carry out, transactions among our companies which may be deemed controlling or controlled entities in relation to each other, as well as transactions with other parties which may be considered to be “interested party transactions” under Russian law. Since 2017, such transactions, generally, do not require prior consent of disinterested directors, disinterested independent directors or disinterested shareholders. However upon request of a sole executive body, a member of the collegial executive body, a member of the board of directors or a shareholder or group of shareholders holding in aggregate at least 1% of the voting shares, such prior consent must be obtained. The provisions of Russian law defining for which transactions a consent must be obtained are subject to different interpretations, and these transactions may not always be properly approved, including by former shareholders. We cannot make any assurances that our and our subsidiaries’ applications of these rules will not be subject to challenge by shareholders. Any such challenges, if successful, could result in the invalidation of transactions, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In addition, Russian law requires a three-quarters majority of the voting stock present at a general shareholders’ meeting to approve certain matters, including, for example, charter amendments, reorganizations, major transactions involving property in excess of 50% of the balance sheet value of the company’s assets, acquisition by the company of outstanding shares and certain share issuances. In some cases, minority shareholders may not give prior consent to interested party transactions requiring their approval or other matters requiring approval of minority shareholders or supermajority approval. In the event that these minority shareholders or a shareholder holding at least 1% of the voting shares were to successfully challenge past interested party transactions, or do not approve or give prior consent to interested party transactions or other matters in the future, we could be limited in our operational flexibility and our business, financial condition, results of operations and prospects could be materially adversely affected.
Minority shareholder lawsuits, if resolved against our group companies, could have a material adverse effect on our financial condition and results of operations.
Russian corporate law allows minority shareholders to bring claims against the company challenging decisions of its governing bodies. In particular, they are entitled to challenge decisions of the general shareholders’ meeting if such shareholder(s) did not participate in such meeting or voted against and this decision infringes such shareholder’s rights and (or) interests. A shareholder or shareholders holding at least 1% of the voting shares or a member of the board of directors may also challenge the interested party and major transactions. These features of Russian corporate law are often abused by minority shareholders, who can bring claims in local courts seeking injunctions and other relief for which, in some cases, we may not receive notice. Any such actions by minority shareholders, if resolved against our group companies, could have a material adverse effect on our business, financial condition, results of operations and prospects. See “Item 8. Financial Information — Litigation — Securities litigation.”
A majority of our employees are represented by trade unions, and our operations depend on good labor relations.
As of December 31, 2017,2019, approximately 57%56% of all our employees were represented by trade unions. Although we have not experienced any business interruption at any of our companies as a result of labor disputes from the dates of their respective acquisition by us, and we consider our relations with our employees to be good, undergood. Under Russian law, unions have the legal right to strike and other Russian companies with large union representation periodically face interruptions due to strikes, lockouts or delays in renegotiations of collective
bargaining agreements. Our businesses could also be affected by similar events if our relationships with our labor force and trade unions worsen in the future. We have extended the industry agreements for coal and ore mining and smelting industries and have renegotiated most related collective bargaining agreements. If we are unable to prolong collective bargaining agreements on similar conditions in the future or our employees are dissatisfied with the terms of the collective bargaining agreements and undertake any industrial action, it could have material adverse effects on our business, financial condition, results of operations and prospects.
We do not carry the types of insurance coverage customary in more economically developed countries for a business of our size and nature, and a significant adverse event could result in substantial property loss and inability to rebuild in a timely manner or at all.
The insurance industry is still developing in Russia, and many forms of insurance protection common in more economically developed countries are not available in Russia on comparable terms, including coverage for business interruption. At present, most of our Russian production facilities are not insured, and we have no coverage for business interruption or for third-party liability, other than insurance required under Russian law, collective bargaining agreements, loan agreements or other undertakings. Some of our international production facilities are not covered by comprehensive insurance typical for such operations in Western countries. We cannot assure you that the insurance we have in place is adequate for the potential losses and the liabilityliabilities we may suffer.
Since most of our production facilities lack insurance covering their property, if a significant event were to affect one of our facilities, we could experience substantial financial and property losses, as well as significant disruptions in our production activity, for which we would not be compensated by business interruption insurance.
Since we do not maintain separate funds or otherwise set aside reserves for these types of events, in case of any such loss or third-party claim for damages we may be unable to seek any recovery for lost or damaged property or compensate losses due to disruption of production activity. Any such uninsured loss or event may have a material adverse effect on our business, financial condition, results of operations and prospects.
If transactions, corporate decisions or other actions of members of our group and theirpredecessors-in-interest were to be successfully challenged on the basis ofnon-compliance with applicable legal requirements, the remedies in the event of any successful challengeconsequences could include the invalidation of such transactions, corporate decisions or other actions or the imposition of other liabilities on such group members.
Businesses of our group, or theirpredecessors-in-interest at different times, have taken a variety of actions relating to the incorporation of entities, share issuances, share disposals and acquisitions, mandatorybuy-out offers, acquisition and valuation of property, including land plots, interested party transactions, major transactions, decisions to transfer licenses, meetings of governing bodies, other corporate matters and antimonopoly issues that, if successfully challenged on the basis ofnon-compliance with applicable legal requirements by competent state authorities, counterparties in such transactions or shareholders of the relevant members of our group or theirpredecessors-in-interest, could result in the invalidation of such actions, transactions and corporate decisions, restrictions on voting rights or the imposition of other liabilities. As applicable laws of the jurisdictions where our group companies are located are subject to varying interpretations, we may not be able to defend successfully any challenge brought against such actions, decisions or transactions, and the invalidation of any such actions, transactions and corporate decisions or imposition of any restriction or liability could have a material adverse effect on our business, financial condition, results of operations and prospects.
Terrorist attacks and threats, escalationoutbreaks or escalations of military activity,armed hostilities, as well as massive cyber attackscyber-attacks or incidents, and government regulation in response to such attacks or acts of war may negatively affect our business, financial condition, results of operations and prospects.
TerroristWe may be subject, directly or indirectly, to terrorist attacks and threats, escalationoutbreaks or escalations of military activity,armed hostilities, as well as massive cyber attackscyber-attacks or incidents, and an increase in government regulation in response to such attacks or acts of war may negatively affect our business. Therewar. These events could because delays or losses in transportation and deliveries of our products to our customers, increased government regulation, and decreased sales due to disruptions in the businesses of our customers. It is possible that anycustomers, harm to people, the environment and our assets, and the loss or misuse of data, intellectual property or other sensitive information. Any such occurrences could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our operations may be adversely affected by disruptions to our information technology systems, including disruptions from cybersecurity incidents.
As is typical of modern businesses, Mechel is reliant on the continuous and uninterrupted operation of its information technology (“IT”) systems. User access and security of all our sites and IT systems can be critical elements to our operations. In particular, we depend on our IT systems for a variety of functions, including automated machinery, financial reporting, data management and email communications. Any IT failure pertaining to availability, access or system security could potentially result in disruption of our activities and personnel, and could adversely affect our reputation, business, financial condition, results of operations and prospects.
Potential risks to IT systems could include unauthorized attempts to extract business sensitive, confidential or personal information, denial of access extortion, corruption of information or disruption of business processes, or inadvertent or intentional actions by our employees or vendors. A cybersecurity incident resulting in a security breach or failure to identify a security threat could disrupt our business or operations and could result in the loss of sensitive, confidential or personal information or other assets, as well as litigation, regulatory enforcement, violation of privacy or securities laws and regulations, and remediation costs, all of which could materially impact our business or reputation.
We have used certain information in this document that has been sourced from third parties.parties and may not be reliable.
We have sourced certain information contained in this document from independent third parties, including private companies, government agencies and other publicly available sources. We believe these sources of information are reliable and that the information fairly and reasonably characterizes the industry in countries where we operate. However, although we take responsibility for compiling and extracting the data, we have not independently verified this information. In addition, the official data published by Russian federal, regional and local governments may substantially differ from those of Western countries. Official statistics may also be produced on different bases than those used in Western countries.
Risks Relating to Our Shares and ADSs and the Trading Market
The price of our shares and ADSs could be volatile and could drop unexpectedly, making it difficult for investors to resell our shares or ADSs at or above the price paid.
The price at which our shares and ADSs trade is influenced by a large number of factors, some of which are specific to us and our operations and some of which are related to the mining and steel industries and equity markets in general. As a result of these factors, investors may not be able to resell their shares or ADSs at or above the price paid for them. In particular, the following factors, in addition to other risk factors described in this section, may have a material impact on the market price of our shares and ADSs:
investor perception of us as a company;
actual or anticipated fluctuations in our revenues or operating results;
announcement of intended acquisitions, disposals or financings, or speculation about such acquisitions, disposals or financings;
changes in our dividend policy, which could result from changes in our cash flow and capital position;
sales of blocks of our common shares, common ADSs, preferred shares or preferred ADSs by significant shareholders, including the Justice persons;shareholders;
terms and timing of any refinancing or restructuring of our indebtedness;
actual or potential litigation involving us;
changes in financial estimates and recommendations by securities research analysts;
fluctuations in Russian and international capital markets, including those due to events in other emerging markets;
the performance of other companies operating in similar industries;
regulatory developments in the markets where we operate, especially Russia and the European Union;
international political and economic conditions, including the effects of fluctuations in foreign exchange rates, interest rates and oil prices and other events such as terrorist attacks, military operations, changes in governments and relations between countries, international sanctions, in particular against Russian companies and individuals, natural disasters and the uncertainty related to these developments;
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news or analyst reports related to markets or industries in which we operate; and
general investor perception of investing in Russia.
As a result of deteriorating market conditions in 2014 for our main products, together with our high leverage, our shares and ADSs price dropped significantly in 2014, and ADSs started trading below one U.S. dollar and thus becamenon-compliant with the NYSE continuous listing standards. On February 27, 2015, the 30trading-day average closing price of ADSs amounted to $1.26 per ADS. As a result, we received official notice from the NYSE on March 2, 2015 that our ADSs came back into compliance with the listing standards.
On August 19, 2015, we received an official notice from the New York Stock Exchange (“NYSE”) stating that the price for Mechel ADSs had fallen below the $1.00 threshold and we were required to bring our share price and average share price back above one U.S. dollar within six months from the date of receipt of the notice.
In order to regain compliance with the NYSE requirements, we changed the ratio of our ADSs from one ADS per one common share to one ADS per two common shares, which became effective on January 12, 2016. As a result, we received official notice from the NYSE on February 1, 2016 that our ADSs came back into compliance with the listing standards. If our shares or ADSs cease to trade on their respective securities exchanges in the future, including due tonon-compliance with applicable listing standards, it may have a material adverse impact on the market price and liquidity of the shares and ADSs.
Our ability to pay dividends depends primarily upon receipt of sufficient funds from our subsidiaries.
Because we are a holding company, our ability to pay dividends depends primarily upon receipt of sufficient funds from our subsidiaries. Under Russian law, dividends may be declared and paid only out of net profits calculated under the Russian accounting standards and as long as certain conditions have been met, including if the value of the net assets, calculated under the Russian accounting standards, is not less (and would not become less as a result of the proposed dividend payment) than the sum of the charter capital, the reserve fund and the difference between the liquidation value and the par value of the issued and outstanding preferred shares. See “Item 10. Additional Information — Charter and Certain Requirements of Russian Legislation — Description of Capital Stock — Dividends.” Currently, some of our subsidiaries do not meet this criteria and cannot approve payment of, or pay dividends. See “— Risks Relating to the Russian Federation — One or more of our subsidiaries could be forced into liquidation on the basis of formalnon-compliance with certain requirements of Russian law, which could materially adversely affect our business, financial condition, results of operations and prospects.”
Furthermore, the payment of dividends by our subsidiaries and/or our ability to repatriate such dividends may, in certain instances, be subject to taxes, statutory restrictions, retained earnings criteria, and covenants in our subsidiaries’ financing arrangements and are contingent upon the earnings and cash flow of those subsidiaries. See note 2423 to the consolidated financial statements. In addition, our loan agreements which we have restructured contain restrictions on the payment of dividends on our common and preferred shares. See “Item 8. Financial Information — Dividend Distribution Policy.”
Upon introductionSome of a system of recording the depositary’s rightsour shares are represented by ADSs and GDSs, which may impede our ability to implement important business decisions.
Pursuant to applicable Russian law, our depositary may vote the shares underlying depositary receipts,our ADSs and GDSs on behalf of their holders if certain information of the depositary is required to disclose information on ADS and GDS ownersholders (such as the identity of and the corresponding number of shares attributable to each holder, as well as voting instructions) has been disclosed to the depositary in ordercompliance with Russian legal requirements. If the required information is not disclosed to exercise voting rightsthe depositary (e.g., due to multi-layered ADS or GDS ownership chains or otherwise) or if the depositary bank fails to provide such information to us in a prompt manner, ADS and receive dividends with respectGDS holders may be unable to vote the shares underlying their ADSs and GDSs.GDSs, accordingly.
Effective January 1, 2013, a systemIf any of recording the depositary’s rightsthese events were to the shares underlying depositary receipts was introduced by the Federal LawNo. 415-FZ of December 7, 2011, as amended on December 29, 2012 (“Federal Law No. 415-FZ”). Pursuant to the system, the underlying shares are no longer recorded at the depositary’s ‘owner’s account’ opened with a Russian custodian holding a ‘depo account of nominee holder’ with the issuer’s shareholder register. Instead, the underlying shares are now recorded at a ‘depo account of depositary programs’ opened with a Russian custodian which in its turn has a depo account of nominee holder
opened with the central depositary. On November 6, 2012, the FFMS granted JSC National Settlement Depositary (“NSD”) the status of Russian central depositary. Starting from November 6, 2013, the depo accounts of depositary programs should be opened for depositaries, and shares represented by depositary receipts should be recorded in depo accounts of depositary programs.
In addition to the recording system, the Federal LawNo. 415-FZ also sets forth obligations for a depositary to disclose information on depositary receipt owners and other legal entities exercising rights to depositary securities in order to exercise voting rights with respect to the shares represented by depositary receipts (“depositary receipt owners”). The CBR by its DirectiveNo. 3680-U dated June 15, 2015 sets forth the requirements for the provision of information about the depositary receipt owners. Such information is provided to the issuer in the form of a list of persons who exercise the rights under the depositary receipts. The list is provided to the issuer by the foreign depositary which opens the depo account of depositary programs. The list is provided for the preparation and holding of a shareholders’ meeting. Furthermore, any obligations of the depositary to disclose information on depositary receipt owners in order to receive dividends were abolished effective January 1, 2014 pursuant to the Federal LawNo. 282-FZ of December 29, 2012, as amended (“FederalLaw No. 282-FZ”). Under the Federal LawNo. 282-FZ, the payment of dividends on the shares represented by depositary receipts is made to the foreign depositary which opens the depo account of depositary programs.
Currently, it is not clear whether the term ‘depositary receipt owner’ means a holder registered on the records of the depositary, a securities intermediary or a beneficial owner of a depositary receipt. As a result, the scope of the above reporting obligations, which may affect the rights ofoccur, our ADS and GDS holders also remains uncertain. We cannot assure you that the Federal LawNo. 415-FZcould be restricted or hindered from voting at Mechel’s shareholder meetings, which could impede our ability to implement business decisions and, the other regulations by the CBR, to which the powersin turn, materially and adversely affect our business, financial condition and results of the FFMS were delegated, will be compatible with the way in which depositary receipt programs were customarily operated in the past or with foreign confidentiality regulations, or that the requirements will not impose additional burdens upon the depositary, ADS and GDS holders or their respective securities intermediaries, any of which may cause investments in our ADSs to be seen as less attractive.
In addition, the Federal LawNo. 282-FZ requires the foreign depositary to take all reasonable steps to provide information on depositary receipt owners to the issuer, state arbitrazh courts, the CBR and governmental investigative authorities upon their request, and depositary receipt owners may not refuse to provide such information in response to the depositary if so requested. The CBR is entitled to demand the depositary to cure any breach of such disclosure requirements, and if the depositary fails to cure, the CBR may suspend or limit any operations with depo accounts of depositary receipt program for up to six months with respect to the number of securities not exceeding the number of securities for which the obligation to provide information has not been fulfilled. It is unclear how the CBR will use these regulatory powers. Any suspension of or limitation on our ADS or GDS programs could have a material adverse effect on the value of the ADSs.operations.
The depositary may be required to take certain actions due to Russian law requirements which could adversely impact the liquidity and the value of the shares and ADSs.
If at any time the depositary believes that the shares deposited with it against the issuance of ADSs represent (or, upon accepting any additional shares for deposit, would represent) a percentage of shares which exceeds any threshold or limit established by any applicable law, directive, regulation or permit, or satisfies any condition for making any filing, application, notification or registration or obtaining any approval, license or permit under any applicable law, directive or regulation, or taking any other action, the depositary may (1) close its books to
deposits of additional shares in order to prevent such thresholds or limits being exceeded or conditions being satisfied or (2) take such steps as are, in itsthe depositary’s opinion, necessary or desirable to remedy the consequences of such thresholds or limits being exceeded or conditions being satisfied and to comply with any such law, directive or regulation, including, causingpro ratacancellation of ADSs and withdrawal of underlying shares from the depositary receipt program to the extent necessary or desirable to so comply. Any such circumstances may affect the liquidity and the value of the shares and ADSs.
Voting rights with respect to the shares represented by our ADSs are limited by the terms of the relevant deposit agreement for the ADSs and relevant requirements of Russian law.
ADS holders have no direct voting rights with respect to the shares represented by the ADSs. They can only exercise voting rights with respect to the shares represented by ADSs in accordance with the provisions of the deposit agreements relating to the ADSs and relevant requirements of Russian law. Therefore, there are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps which are involved. Our charter require us to notify shareholders not less than 30 days prior to the date of any meeting of shareholders and at least 50 days prior to the date of an extraordinary meeting to elect our board of directors. Within specified time limits, a notice of the general shareholders’ meeting shall be published on our sitewebsite www.mechel.ru in the information and telecommunication network Internet.. It also may be brought to the attention of persons entitled to participate in the general shareholders’ meeting and registered in the register of shareholders by other means, including by post or delivery to each of the above persons against signature or via publishing in the newspaperRossiyskaya Gazeta. As an additional way of notification, other mass media (television, radio) can be used. Our common shareholders, as well as our preferred shareholders in cases when they have voting rights, are able to exercise their voting rights by either attending the meeting in person or voting by power of attorney.
For ADS holders, in accordance with the deposit agreements, we will provide the notice to the depositary. The depositary has in turn undertaken, as soon as practicable thereafter, to mail to ADS holders notice of any such meeting of shareholders, copies of voting materials (if and as received by the depositary from us) and a statement as to the manner in which instructions may be given by ADS holders. To exercise their voting rights, ADS holders must then timely instruct the depositary how to vote their shares. As a result of this extra procedural step involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of shares. ADSs for which the depositary does not receive timely voting instructions will not be voted at any meeting.
In addition, although securities regulations expressly permit the depositary to split the votes with respect to shares underlying the ADSs in accordance with instructions from ADS holders, there is little court or regulatory guidance on the application of such regulations, and the depositary may choose to refrain from voting at all unless it receives instructions from all ADS holders to vote the shares in the same manner. Holders of ADSs may thus have significant difficulty in exercising voting rights with respect to the shares underlying the ADSs. There can be no assurance that holders and beneficial owners of ADSs will: (1) receive notice of shareholder meetings to enable the timely return of voting instructions to the depositary; (2) receive notice to enable the timely cancellation of ADSs in respect of shareholder actions; or (3) be given the benefit of dissenting or minority shareholders’ rights in respect of an event or action in which the holder or beneficial owner has voted against, abstained from voting or not given voting instructions.
ADS holders may be unable to repatriate their earnings.
Dividends that we may pay in the future on the shares represented by the ADSs will be declared and paid to the depositary in rubles. Such dividends will be converted into U.S. dollars by the depositary and distributed to holders of ADSs, net of the fees and charges of, and expenses incurred by, the depositary, together with taxes withheld and any other governmental charges. The ability to convert rubles into U.S. dollars is subject to the currency markets. Although there is an active market for the conversion of rubles into U.S. dollars, including the interbank currency exchange andover-the-counter and currency futures markets, the functioning of this market in
the future is not guaranteed and, in particular may be negatively impacted by any future imposition of exchange controls imposed by the Russian authorities in an effort to stabilize the value of the ruble.
ADS holders may not be able to benefit from the United States-Russia income tax treaty.
Under Russian tax legislation, dividends paid to anon-resident holder of shares of a Russian company generally will be subject to a 15% withholding tax. This tax rate may potentially be reduced to 10% or 5% for
U.S. holders of the shares that are legal entities and organizations and to 10% for U.S. holders of the shares that are individuals under the Convention between the United States of America and the Russian Federation for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital (the “United States-Russia income tax treaty”), provided a number of conditions are satisfied. In connection with the enactment of amendmentsPursuant to existing Russian tax legislation, effective from January 1, 2014, the reduced tax rate of 5% established in accordance with certain provisions of the United States-Russia income tax treaty does not apply on dividend payments under ADSs. The general rate of 10% which is established by the treaty and does not account for benefits applies, subject to the submission of certain information to the tax agent. If such information has not been submitted to the tax agent in the prescribed manner and in a certain period of time, a tax rate of 30% is applied. Thus, the tax agent may be obliged to withhold tax at highernon-treaty rates when paying out dividends, and U.S. ADS holders may be unable to benefit from the United States-Russia income tax treaty. ADS holders may apply for a refund of a portion of the tax withheld under an applicable tax treaty, however, this process may be time-consuming and no assurance can be given that the Russian tax authorities will grant a refund. See “Item 10. Additional Information — Taxation — Russian Income and Withholding Tax Considerations” for additional information.
Capital gains from the sale of ADSs may be subject to Russian profit tax.withholding tax in Russia.
Under Russian tax legislation, gains realized by foreign organizations from the disposition of Russian shares and securities, as well as financial instruments derived from such shares, with the exception of shares that are traded on an organized securities market, may be subject to Russian profitwithholding tax or income taxin Russia if more than 50% of our assets directly or indirectly consist of immovable property located in Russia. Gains arising from the sale on foreign exchanges (foreign market operators) of securities or derivatives circulated on such exchanges are not considered Russian source income.
However, no procedural mechanism currently exists to withhold and remit this tax with respect to sales made to persons other than Russian companies and foreign companies with a registered permanent establishment in Russia. Gains arising from the disposition on foreign stock exchanges of the foregoing types of securities listed on these exchanges are not subject to taxation in Russia.
Gains arising from the disposition of the foregoing types of securities and derivatives outside of Russia by U.S. holders who are individuals not resident in Russia for tax purposes will not be considered Russian source income and will not be taxable in Russia. Gains arising from the disposition of the foregoing types of securities and derivatives in Russia by U.S. holders who are individuals not resident in Russia for tax purposes may be subject to a withholdingpersonal income tax withheld at source of income in Russia based on an annual tax return, which they may be required to submit with the Russian tax authorities.
Holders of ADSs may have limited recourse against us and our directors and executive officers because most of our operations are conducted outside the United States and all of our directors and executive officers reside outside the United States.
Our presence outside the United States may limit ADS holders’ legal recourse against us. Mechel is incorporated under the laws of the Russian Federation. Our directors and executive officers reside outside the United States, principally in Russia. A substantial portion of our assets and the assets of most of our directors and executive officers are located outside the United States. As a result, holders of our ADSs may be limited in their ability to effect service of process within the United States upon us or our directors and executive officers or to
enforce in a U.S. court a judgment obtained against us or our directors and executive officers in jurisdictions outside the United States, including actions under the civil liability provisions of U.S. securities laws. In addition, it may be difficult for holders of ADSs to enforce, in original actions brought in courts in jurisdictions outside the United States, liabilities predicated upon U.S. securities laws.
There is no treaty between the United States and the Russian Federation providing for reciprocal recognition and enforcement of foreign court judgments in civil and commercial matters. These limitations may deprive
investors of effective legal recourse for claims related to investments in the ADSs. The deposit agreements provide for actions brought by any party thereto against us to be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, provided that any action under the U.S. federal securities laws or the rules or regulations promulgated thereunder may, but need not, be submitted to arbitration. The Russian Federation is a party to the United Nations (New York) Convention on the Recognition and Enforcement of Foreign Arbitral Awards, but it may be difficult to enforce arbitral awards in the Russian Federation due to a number of factors, including the inexperience of Russian courts in international commercial transactions, official and unofficial political resistance to enforcement of awards against Russian companies in favor of foreign investors and Russian courts’ inability to enforce such orders.
We and the Justice persons may offer additional preferred shares and preferred ADSs in the future, and these and other sales may adversely affect the market price of the preferred shares and preferred ADSs.
As of MarchDecember 31, 2018,2019, out of the 138,756,915 issued preferred shares, 40%approximately 39.5% are held by our wholly-owned subsidiary Skyblock Limited, the remaining preferred shares are held by the public and may be held by James C. Justice II, James C. Justice III, James C. Justice Companies Inc. and Jillean L. Justice (collectively, the “Justice persons”). The Justice persons disposed or may dispose of all or part of the remaining preferred shares they held through one or more offerings or broker trades.public. It is also possible that we may decide to offer additional preferred shares and preferred ADSs through public offering or broker trades in the future, including preferred shares held by Skyblock Limited. Additional offerings or sales of preferred shares and preferred ADSs by us, or the Justice persons, or the public perception that such offerings or sales may occur, could have an adverse effect on the market price of our preferred shares and preferred ADSs.
Risks Relating to the Russian Federation
Emerging markets such as Russia are subject to greater risks than more developed markets, and financial turmoil in developed or other emerging markets could have a material adverse effect on our business and could cause the value of our shares and ADSs to fluctuate widely.
Investors in emerging markets such as the Russian Federation should be aware that these markets are subject to greater risk than more developed markets, including in some cases significant legal, economic and political risks. Investors should also note that the value of securities of Russian companies is subject to rapid and wide fluctuations due to various factors. The emergence of new tensions between Russia and other countries, sanctions imposed sanctions by the Russian Federation on some countries and vice versa may lead to outflow of the investors from the market, quick and hugeas well as rapid, significant sales of Russian assets, which willcould result in reductions in the price of Russian securities. We cannot assure you that any such developments will not have a material adverse effect on our business, financial condition, results of operations and prospects, and the value of our shares and ADSs is expected to be highly volatile while tension between Russia and other countries remains unresolved and/or the Russian economy continues to deteriorate.
Investors should also note that emerging markets such as the Russian Federation are subject to rapid change and that the information set forth in this document may become outdated relatively quickly. Moreover, financial turmoil in any emerging market country tends to adversely affect adversely the value of investments in all emerging market countries as investors move their money to more stable, developed markets. As has happened in the past, financial problems or an increase in the perceived risks associated with investing in emerging economies could dampen foreign investment in the Russian Federation and adversely affect the Russian economy. In addition, during such times, companies that operate in emerging markets can face liquidity constraints as foreign funding sources become less available. Accordingly, investors should exercise particular care in evaluating the risks
involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved.
Domestic, regional and international political and diplomatic conflicts could create an uncertain operating environment that could adversely affect our business and hinder our long-term planning ability.
Emerging markets such as Russia has endured ethnic, religious, historicalare subject to heightened volatility based on economic, military and other divisions, which have, on occasion, given rise to tensions and, in certain cases, diplomatic andpolitical conflicts. For example, a military conflict both internally and with other countries.
For example, the Russian Federation was involved in armed conflict with Georgia in August 2008 between Russia and differing views onGeorgia involving South Ossetia and Abkhazia, the Georgia conflict have had an impact onaccession of Crimea to Russia in March 2014, the relationship between the Russian Federation, the European Union, the United States and certain former Soviet Union countries. In addition, the relationship betweenongoing crisis in Eastern Ukraine and the subsequent economic sanctions imposed on certain Russian Federation has in the recent past been subject to significant strain for a number of reasons, including Ukraine’s failure to paycompanies and accumulation of payment arrears relating to the supply of energy resources, Ukraine’s possible accession to NATO and the European Union. More recently, Russia’s relations with Ukraine have reached an historic post-Soviet low point following renewed political instability in Ukraine that resulted in the departure from office of Mr. Yanukovich (Ukraine’s former president), Russia’s role in the subsequent accession of Crimea and Sevastopol to Russia, and widespread accusations that Russia is actively involved in or otherwise supporting insurgents in eastern Ukraine in their struggle against Ukraine’s central authorities. This has resulted in a substantial deterioration in Russia’s relations withindividuals by the United States, the European Union, Canada and other countries such as Canada, Japan and Australia, and has led to the imposition of sanctions against certain Russian individuals and entities and has contributed to certain volatilityresulted in significant overall price declines in the Russian economy and a deterioration in Russia’s macroeconomic condition and prospects.stock exchanges. See “— Risks Relating to the Russian Federation — The politicalSanctions imposed by the United States and economic crisis in Ukrainethe European Union, as well as other politically related disagreements and allegations between Russia and other countries, and sanctions imposed as a result thereof by the United States and the European Union may have a material adverse effect on our business, liquidity and financial condition, as well as the trading market for and value of our shares and ADSs.” More recently in March 2018, more than 140 Russian diplomats were expelled worldwideThe reaction of those countries, resulting geopolitical tensions and Russia in turn announced the expulsion of 60 American diplomatsensuing sanctions programs have had and the closure of the United States consulate in Saint Petersburg, Russia. If any of these tensions intensify or new tensions emerge between the Russian Federation and Ukraine, Georgia, the European Union, the United States or any other countries, leading potentiallycould continue to the imposition of further trade sanctions or embargoes,have an adverse effect on the Russian economy, will likely experience furtheraccelerating capital outflow from Russia and resulting in foreign exchange rate fluctuations and volatility and deterioration.
In September 2015,on the Russian Federal Council approved the usemarkets. There is no assurance that Russia will not introduce measures to address capital outflow from Russia, including by adopting regulations imposing restrictions on transactions on capital and debt markets or otherwise, any of Russian forces in Syria, following a formal request from the Syrian government. Operations in Syria commenced in late September 2015. In December 2017, the Russian President ordered to start partially reverting the operations in Syria, nevertheless, the Russian military contingent is still involved in operations which take place in Syria. Furthermore, in November 2015, the Turkish air force shot down a Russian strike aircraft over the territory of Syria, which resulted in tensions between Russiacould adversely affect investor interest and Turkey and led to imposition of wide range of sanctions by Russia against Turkey, which were partially removed in the second half of 2016 and in 2017.
Many of the aforementioned events have adversely affected the Russian economy andgenerally. The emergence or escalation of any tensions in Russia or neighboring regions could negatively affect the Russian financial and banking markets, increased capital outflows, as well as worsened general business and investment climate in Russia. The Russian stock exchanges have experienced heightened volatility, Russia’s credit markets have tightened, and the exchange rateeconomy of the ruble against the U.S. dollarRussia and other currencies has depreciated significantly.countries that may be involved. Such tensions or conflicts may lead to reduced liquidity, trading volatility and significant reductions in the price of listed Russian securities, with a resulting negative effect on the liquidity, stability and trading price of our shares and ADSs.
In partPartly as a result of political tensions, international sanctions, ruble volatility and a drop in the oil price, in January 2015,prices, Standard & Poor’s, loweredMoody’s and Fitch downgraded the long-credit ratings of the Russian Federation in 2015. The ratings agencies have subsequently upgraded the credit ratings and/or outlooks of the Russian Federation between 2016 and short-term2019. As of the date hereof, the Russian Federation’s foreign currencysovereign credit rating to “BB+/B” fromwas“BBB-/A-3” and local currency rating to“BBB-/A-3” from“BBB/A-2,” both with(with a negative outlook. In September 2016,stable outlook) by Standard & Poor’s, confirmed the Russian Federation’s ratings and revised the outlook from negative to stable. In March and September 2017, the Russian Federation’s ratings were confirmed at previous levels (“BB+/B” for foreign currency and“BBB-/A-3” for local currency) with outlook changed to positive. In February 2018, Standard & Poor’s raised the Russian Federation’s ratings to“BBB-/A-3” for foreign currency and“BBB/A-2” for local currency, both with“Baa3” (with a stable outlook. In January 2015,outlook) by Moody’s Investors
Service loweredand “BBB” (with a stable outlook) by Fitch. However, there can be no assurance that further downgrades of Russia’s government bondsovereign credit rating to Baa3 from Baa2, further downgrading it in February 2015 to Ba1, with a negative outlook. In February 2017, Moody’s confirmed Russia’s Ba1 rating and revised the outlook from negative to stable and further revised the outlook from stable to positive in January 2018. In January 2015, Fitch downgraded the Russian Federation’s long-term foreign and local currency Issuer Default Rating to“BBB-” with a negative outlook. In October 2016, Fitch confirmed the Russian Federation’s ratings and revised the outlook from negative to stable. In March and September 2017, the Russian Federation’s ratings were confirmed at“BBB-” with a change in outlook to positive. In February 2018, Fitch reconfirmed the Russian Federation’s ratings.will not occur.
The risks associated with these events or potential future events could materially and adversely affect the business and investment environment, and overall consumer confidence and economy in the Russian Federation, which in turn could have a material adverse effect on our business, financial condition, results of operations and prospects.
The politicalSanctions imposed by the United States and economic crisis in Ukrainethe European Union, as well as other politically related disagreements and allegations between Russia and other countries, and sanctions imposed as a result thereof by the United States and the European Union may have a material adverse effect on our business, liquidity and financial condition, as well as the trading market for and value of our shares and ADSs.
In connection with the events in Ukraine, theThe United States and the European Union (as well as certain other countries) have imposed sanctions and export control restrictions on certain Russian individuals and Ukrainian personsentities and entities. Furthermore,taken other actions in response to the ongoing situation in Ukraine and Crimea, alleged Russian cyber-attacks, election interference, activities in Syria and nerve gas incident in the United Kingdom. See “— Domestic, regional and international political and diplomatic conflicts could create an uncertain operating environment that could adversely affect our business and hinder our long-term planning ability.” In particular, the United States contemplate to implement further legislation to imposeand the European Union have imposed (i) sanctions on Russia, including in connectionthat block the property of certain designated businesses, organizations and individuals and restrict travel (“Blocking Sanctions”), (ii) sectoral sanctions that prohibit certain types of transactions with the alleged interference into the 2016 U.S. Presidential election, as of the date hereof the discussions are still ongoing.companies
The current sanctions regime is a result of multiple extensions by the U.S. and EU
operating in the termRussian energy, financial and scopedefense sectors, including limitations on provision of debt and/or equity financing (“Sectoral Sanctions”), and (iii) territorial sanctions restricting investment in and trade with Crimea which, subject to some exemptions, prohibit virtually all investments into, imports from, and exports to, the most recentterritory of which were taken in March 2018 (in relation to both, the EUCrimea, aiming at severely restraining any U.S. orEU-related business contacts with this territory. The Blocking Sanctions and the U.S. sanctions). It is currently unclear how long theseSectoral Sanctions apply to individuals and entities named on the respective sanctions will remainlists as well as to entities that are owned (directly or indirectly) 50% or more, in placeaggregate, by one or more sanctioned persons and, whether new sanctionsaccordingly, may be imposed.extend beyond Russia. In addition, on August 2, 2017, the U.S. President Trump signed into law the Countering America’s Adversaries Through Sanctions Act (the “ActCAATSA”) that includes additional sanctions that may be introduced against Russian entities. TheIn August 2018, the U.S. Department of State imposed new sanctions on Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act inter alia,of 1991 (the “CBW Act”).
To date, the Blocking Sanctions have been imposed against prominent Russian politicians, executive branch officials, members of the Russian Parliament, public figures, certain owners of large businesses in Russia, as well as their assets and enterprises, and major defense and other Russian companies. In addition, the United States and the European Union have introduced Sectoral Sanctions against (a) codifiesmajor Russian banks, such as Gazprombank, Vnesheconombank, VTB Bank (PJSC), Russian Agricultural Bank and Sberbank, (b) Transneft, Gazprom Neft, Rosneft and Novatek, and (c) State Corporation Rostec and other military industrial corporations. We have business relations with certain Russian persons and their controlled entities that are identified as targets of U.S. and EU sanctions, including certain of the existingbanks mentioned. We believe that our dealings with such persons do not violate applicable U.S. or EU sanctions against Russia established by former President Obama’s executive orders, (b) reducesprograms. However, to the permitted termsextent that we engage in transactions with any relevant sanctions-designated persons, U.S. sanctions could have potential adverse effects on such transactions. Moreover, we could be limited in sources of financing underfor such dealings and/or be subject to related scrutiny by relevant authorities.
On August 2, 2019, the existing sectoral sanctionsU.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) proceeded to issue a directive that prohibited U.S. banks from participating in the primary market fornon-Ruble denominated bonds issued by the Russian sovereign and further restricts supplies of equipmentalso prohibited U.S. banks from lendingnon-Ruble denominated funds to certainthe Russian energy companies, (c) allowssovereign with effect from August 26, 2019. In December 2019, the U.S. President signed into law a bill passed by the U.S. Congress that provides for the introduction of certain sanctions on persons providing certain assistance in the construction of the Nord Stream 2 pipeline project. It is currently not possible to extend sectoralpredict what impact these potential new sanctions to further sectors ofor any retaliating measures by the Russian Government may have on the Russian economy (such as railways, mining and metals) and introduce additionalor the group’s business.
Several pieces of legislation directed at amplifying U.S. sanctions against new persons, (d) provides for imposing a set of “secondary sanctions,” which target activities ofnon-U.S. persons, such that foreign persons who engage in certain activities in Russia (in relation to, inter alia, construction, modernization and repair of energy export pipelines, intelligence and defense sectors, sanctions evasion, privatizations and activities that undermine the cybersecurity of any person or government) now face the prospect of adverse economic consequences from the United StatesRussian Federation have been introduced in the form of a denial of U.S. benefits.Congress and are currently under consideration. The sanctions package may have a material adverse effect oncurrent initiatives, if enacted, could affect, among other things, the Russian financial markets and investment climatesovereign debt, Russian energy projects and the Russian economy generally.energy and financial sectors. It is currently unclear at which point, if at all, any of these bills could be signed into law and what would be the scope of any new sanctions that may be imposed pursuant to such law.
NoAlthough no individual or entity within our group has been designated with sanctions. Additional designations mayU.S. or EU sanctions to date, there can be made, or additional categories of sanctions may be created, at any time, and we can give no assurance that any member of our group,further or individuals holding positions in our group,more restrictive sanctions and/or export controls will not be affectedintroduced by future sanctions designations. The U.S. regulations identify metalsthe United States, the European Union or other countries which could affect such persons and mining as an example of a sector that may be identified for sectoral sanctions, however, at this time, no such identification has been made. U.S. law also provides that persons that “have materially assisted, sponsored or provided financial, material or technological support for, or goods or services to or in support of” any targeted person or activity may be designated for sanctions. Mechel, like a large number of Russian companies, has commercial relationships with entities that are subject to U.S. sanctions.increase the adverse effects above.
Furthermore, certain entities within our group are EU persons. These entitiespersons and are therefore required to comply with the EU sanctions regime, including not conducting business with any sanctioned persons. Most of
the group’s entities, however, are neither U.S. persons nor EU persons, and therefore are restricted in dealings with sanctioned persons only to the extent those dealings are subject to U.S. and/or EU jurisdiction. However, the United States takes a broad view with respect to its sanctions jurisdiction, and there can be no assurance that compliance issues under applicable U.S. and/or EU sanctions laws and regulations will not arise with respect to us or our personnel. In particular, sanctions against Russia and Russian subjects are very recent, their scope and consequences remain subject to interpretation by competent authorities and courts in the United States and the European Union, and no assurance can be given that a broader interpretation may not affect any of the group entities.Non-compliance with applicable sanctions could result in, among other things, the inability
of the relevant group entities to contract with U.S. and/or EU governments or their agencies, civil or criminal liability of such entities and/or their personnel under U.S. and/or EU law, the imposition of significant fines, and negative publicity and reputational damage. In addition, should our dealings with sanctioned counterparties become material, our ability to transact with U.S. or EU persons could be affected. As a result, our ability to raise funding from international financial institutions or the international capital markets may be inhibited.
Further tensions between Russia and other countries and any escalation of related tensions between Russia andThe sanctions imposed by the United States and/orand the European Union in connection with the Ukraine crisis so far have had an adverse effect on the Russian economy, to which we are exposed significantly, prompting downgrades of the credit ratings of the Russian Federation and a number of major Russian companies that are ultimately controlled by the Russian Federation, causing extensive capital outflows from Russia and impairing the ability of Russian issuers to access international capital markets. The governments of the United States and certain EU member states, as well as certain EU officials have indicated that they may consider additional sanctions should tensions in Ukraine continue. The imposition of further sanctions, or continued uncertainty regarding the scope thereof, could have a prolonged adverse impact on the Russian economy, particularly levels of disposable income, consumer spending and consumer confidence, as well as the ability of Russian banks to sustain required liquidity levels and comply with their financial obligations.economy. These impacts could be more severe than those experienced to date. In particular, should either
Although the United Statesgroup has no reason to believe that it or its shareholders may be specifically targeted by the European Union expand their respective sanctions on our existing or future clients, suppliers or other counterparties, a large sector of the Russian economy or otherwise, such an expansion could result in our dealings with designated persons, if any, being materially adversely impacted, the suspension or potential curtailment of business operations between us and the designated persons could occur, and substantial legal and other compliance costs and risks on our business operations could emerge.
Moreover, if we become subject to U.S. or EU sanctions, there can be no assurance that this will not occur. If the U.S. or EU sanctions targeting the Russian metals and mining sector and/or the group and its shareholders are imposed, such sanctions will likely have a material adverse impact on the group in a number of ways. For example, we maymight become unable to deal with persons or entities bound by the relevant sanctions, including international financial institutions, and rating agencies, transact in U.S. dollars, raise funds from investors, or access international capital markets acquire equipment from international suppliers, generally and/or access our assets held abroad. Should any sector in which we operate become subject toso-called “sectoral sanctions,” in either of the United States or the European Union, theexisting funds might be blocked. Furthermore, relevant clearing systems, brokers and other market participants, as well as the New York Stock Exchange (“NYSE,”) may refuse to permit trading in or otherwise facilitate transfers of the ADSs. Furthermore, investors in our shares or ADSs may be restricted in their ability to sell, transfer or otherwise deal in or receive distributions with respect to our shares or ADSs, either because the investor or (in the case of ADSs) the depositary is subject to the jurisdiction of an applicable sanctions regime, which could make such shares or ADSs partially or completely illiquid and have a material adverse effect on their market value.
An expansion Any of sanctions as set forth above would likely have a material adversethe aforementioned could reduce the trading market for the ADSs or may otherwise materially impact on our business, financial condition, resultsthe value of operations or prospects.the ADSs.
Economic risks
Economic instability in Russia could adversely affect our business and the value of our shares and ADSs.
The Russian economy has experienced various risksbeen subject to abrupt downturns in the past, including high state debt, high interest rates, devaluation of the national currency and others, as well aspast. However, since 2000, it experienced positive trends, such as annual increases in the gross domestic product (“GDP”), a relatively stable ruble, strong domestic demand, rising real wages and reduced rates of inflation. However,Nevertheless, the positive trends were interrupted by the global financial crisis in late 2008, which led to a substantial decrease in the GDP’s growth rate of GDP, ruble depreciation and a decline in domestic demand. The Russian government took certain anti-crisis measures using the “stabilization fund” and hard currency reserves in order to soften the impact of the economic crisis on the Russian economy and support the value of the ruble. The
emerging market economies, including Russia, began to experience a new economic slowdown in 2013, which together with political and other disturbances in emerging markets have introduced additional uncertainty in the overall outlook for growth of the global economy. Growth ineconomy.According to Rosstat, the Russian economy has slowed down considerably, recordingstabilized and recorded GDP decline of 3.7% in 2015 and 0.2% in 2016, according to Rosstat. In 2017, GDP recorded growth of 1.5%, according to Rosstat.1.8% in 2017, 2.5% in 2018 and 1.3% in 2019. The deterioration of the Russian economy in recentprior years is resulted from an array of factors, including negative investor sentiment arising from the disturbances in easternEastern Ukraine, international sanctions imposed on Russian companies and individuals, substantial depreciation of the ruble against major world currencies and the precipitous drop in oil prices. See “— Risks Relating to the Russian Federation — The politicalSanctions imposed by the United States and economic crisis in Ukrainethe European Union, as well as other politically related disagreements and allegations between Russia and other countries, and sanctions imposed as a result thereof by the United States and the European Union may have a material adverse effect on our business, liquidity and financial condition, as well as the trading market for and value of our shares and ADSs.” FurtherAny economic instability in Russia could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
The Russian banking system is still developing, and another banking crisis or international sanctions could place severe liquidity constraints on our business.
A substantial portion of our loans are from Russian banks, including state-owned banks such as Sberbank, VTB Bank and Gazprombank, who in recent years have extended the maturity of our loans, waived breaches of financial covenants and reset our financial covenants to give us more flexibility to operate our business. Such banks may not exhibit the same degree of flexibility with respect to our financings as they have in the past due to the imposition of international sanctions against them. Moreover, we rely on the Russian banking system to complete variousday-to-day fund transfers and other actions required to conduct our business with customers, suppliers, lenders and other counterparties.
Despite progress achieved in recent years, the Russian banking system suffers from international sanctions imposed against state-owned banks, weak depositor confidence, high concentration of exposure to certain borrowers and their affiliates, poor credit quality of borrowers and related party transactions. Specifically, sanctions have been imposed by a number of countries against certain Russian banks, financial institutions and companies, as well as certain Russian individuals who hold interests or positions in such banks, financial institutions and companies. Among other measures, the United States and the European Union have imposed Sectoral Sanctions on certain major Russian financial institutions. It is difficult to predict the impact of sanctions on the Russian banking sector as this may continue to evolve over time and whether such sanctions will be expanded in the future; however, there is a risk that Russian banks could be unable to refinance their existing debt or that such refinancing may become more expensive, and/or that Russian banks could be unable to issue loans in amounts necessary for borrowers, and/or that the cost of borrowing could increase significantly for borrowers.
In response to ruble depreciation and decline in Russian economy, the CBR progressively increased its key rate in 2014 from 5.5% to 17%, which resulted in substantial volatility and liquidity shortages on the domestic financial and interbank market. The CBR proceeded to gradually reduce itsreduced the key rate to 7.25% throughout 2015-2018between 2015 and early 2018 and introduced other measures aimed at supporting Russian banking system.system, before increasing the key rate to 7.75% in late 2018 to mitigate the risk of inflation. During 2019, the key rate was gradually lowered to 6.25% and in February 2020 further lowered to 6.0%. Although these measures resulted in partial stabilization of the banking system and assisted some Russian banks in withstanding the recent volatility on the currency and financial markets, the Russian banking system continues to experience financial difficulties and could continue to worsen in the near future due to the impact of international sanctions and general instability of global and Russian economy and domestic financial market. Certain Russian banks have in the past experienced difficulties that have caused them to become insolvent and have their licenses revoked, such as most recently theYugra Bank, Yugra, or to recognize large loan impairment provision lossesloss provisions that required steps to replenish their capital, as in the casecases of the Promsvyazbank, Bin Bank and Otkritie Bank.
A banking or liquidity crisis or the bankruptcy or insolvency of the banks which lend to us or which we use for banking transactions could have a material adverse effect on our business, results of operations, financial condition and prospects.
TheRussia’s physical infrastructure is not as well developed or maintained as the infrastructure in Russia needs significant improvement and investment,more developed countries, which could disrupt normal business activity.
TheRussia’s physical infrastructure is not as well developed or maintained as the infrastructure in Russia largely dates back tomore developed countries. Such physical infrastructure includes the Soviet era and has not been adequately funded and maintained since the dissolution of the Soviet Union. Particularly affected are the rail and road networks, railroad system, power generation and transmission systems, communication systems and building stock. The Russian government has implemented in the past, and may further implement, infrastructure improvements and reorganizations of the nation’s rail, road and power systems. These reorganizations may result in increased charges and tariffs and may not generate sufficient capital investment to repair, maintain and improve these systems. A prolonged or major disruption in normal business activity due to a deterioration of theRussia’s infrastructure, especially as it relates to transportation,
and significant increases in Russia harmscharges and tariffs, could harm the national economy, disruptsdisrupt the transportation of goods and supplies, addsadd costs
to doing business in Russia and canmay interrupt business operations. Theseoperations in Russia, any or all of these factors could have a material adverse effect on our business, financial condition, results of operations and prospects.
The Russian economy and the value of our shares and ADSs could be materially adversely affected by fluctuations in the global economy.
The global economic crisis, social and political instability in some Middle EastEastern countries and in Ukraine, the Chinese economic slowdown followed by the Chinese market’s crash and decline in demand, andas well as the dramatic fall in oil prices and other negative developments in various countries have resulted in increased volatility in the capital markets in many countries, including Russia. As has happened in the past, financial problems in emerging market economies or an increase in the perceived risks associated with investing in emerging market economies could dampen foreign investment in Russia, and Russian businesses could face severe liquidity constraints, further materially adversely affecting the Russian economy. In addition, because Russia produces and exports large amounts of oil, the Russian economy is especially vulnerable to the price of oil on the world market, and a decline in the price of oil or international sanctions against the Russian oil industry could slow or disrupt the Russian economy or undermineweaken the value of the ruble against foreign currencies. DuringIn particular, the periodBrent Crude oil price suffered a significant decrease during 2014 and 2015. The commodity’s price declined from December 15,$112.36 per barrel on June 30, 2014 to $37.28 per barrel on December 14, 2015, the average price for Urals crude oil in the Mediterranean and Rotterdam petroleum markets fell by 24.6%, from $381.8 per tonne to $287.7 per tonne, according to the Ministry of Economic Development of the Russian Federation. Although during the period from December 15, 2015 to December 14, 2016 the average price for Urals crude oil has risen by 47.3% and has further risen by 19.0% during the period from December 15, 2016 to December 14, 2017, prices for petroleum feedstock remain volatile. The ruble’s value against major world currencies has fallen significantly in 2015 and although ruble has recovered during31, 2015. During 2016 and 2019, the Brent Crude oil price continued to be volatile with $56.82 per barrel on December 30, 2016, $66.87 per barrel on December 29, 2017, it still remains volatile. See “Item 3. Key Information — Exchange Rates.”$53.80 per barrel on December 31, 2018 and $66.00 per barrel on December 31, 2019. Further, after OPEC and Russia failed to agree recent production cuts, Saudi Arabia sharply cut its prices, causing the Brent Crude oil price to reach a low of $24.88 per barrel on March 18, 2020. Russia is also one of the world’s largest producers and exporters of metal products and its economy is vulnerable to fluctuations in world commodity prices and the imposition of international sanctions, tariffs and/or antidumping measures by any of its principal export markets.
As many of the factors that affect the Russian and global economies affect our business and the business of many of our domestic and international customers, our business could be materially adversely affected by a downturn in the Russian economy or the global economy. In addition to a reduction in demand for our products, we may experience increases in overdue accounts receivable from our customers, some of whom may face liquidity problems and potential bankruptcy. Our suppliers may raise their prices, eliminate or reduce trade financing or reduce their output. A decline in product demand, a decrease in collectibilitycollectability of accounts receivable or substantial changes in the terms of our suppliers’ pricing policies or financing terms, or the potential bankruptcy of our customers or contract counterparties may have a material adverse effect on our business, financial condition, results of operations and prospects.
In June 2016, a majority of voters in the United Kingdom elected to withdraw from the EU inFollowing a national referendum. In early February 2017,referendum and enactment of legislation by the parliamentgovernment of the United Kingdom, voted in favor of advancing legislation that would give the Prime Minister the authority to initiate the formal process of leaving the EU. On March 29, 2017, the Prime Minister of the United Kingdom signed the letter that gives an official notice to European Council in accordance with Article 50 of the Treaty on European Union of the United Kingdom’s intention to withdrawformally withdrew from the European Union beginningon January 31, 2020 and entered into a legal process of leavingtransition period during which it will continue its ongoing and complex negotiations with the EU. As a result, there remains significant uncertainty aboutEuropean Union relating to the future trading relationship between the United Kingdomparties. Significant political and economic uncertainty remains about whether the EU. In addition,terms of the recent U.S. presidential election,relationship will differ materially from the terms before withdrawal, as well as about the possibility that a resultso-called “no deal” separation will occur if negotiations are not completed by the end of which the Republican party nominee, Donald Trump, became the next president oftransition period.
With respect to the United States, may impact the financial markets and leadpresidential administration of Donald Trump has led to greater uncertainty on the status of trade relations between the U.S.United States and some of its largest trade partners, including the U.S.’sUnited States’ existing trade agreements. agreements, and impacted financial markets.
In addition, the Chinese government’s unpredictable regulation of coal imports, including the implementation of stringent port restrictions, the rise of import duties and the setting of import quotas, may adversely impact our results of operations. For example, the Chinese government imposed a strict quota on 2019 coal imports in order to keep total coal import volumes at a level of 2018. As a result, coal imports into China in December 2019 declined by 72.9%year-on-year (however, total 2019 coal imports into China increased by 6.3%
compared to 2018), according to the General Administration of Customs of China. According to industry analyst, CRU, China is using such import controls primarily as a policy instrument to maintain the price and profitability of domestic coal. Relatedly, CRU anticipates that the Chinese government will continue to closely monitor imports and will implement restrictions as needed through the year in order to keep domestic prices within the acceptable range.
These developments, or the perception that any of them could occur, have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial markets, and may significantly reduce global market liquidity and restrict the ability of key market participants to fund their capital and liquidity requirements and operate in certain financial markets. In addition, any force majeure events, including the occurrence of natural disasters or outbreaks of contagious diseases, such as the recent outbreak of the 2019 novel coronavirus(Covid-19), could affect the volume of international business activity and trade, resulting in a decreased demand for oil and other commodities, which may impact the macroeconomic environment globally. The novel coronavirus(Covid-19), which on March 11, 2020 was declared by the World Health Organization to be a global pandemic, has begun to have numerous effects on the global economy. A global or regional health pandemic could adversely affect the economies and financial markets of many countries resulting in an economic downturn that could negatively affect our operating results. The extent to which the coronavirus may impact our results will depend on future developments and is difficult to predict. Any of these factors could depress economic activity and commodities markets, andas well as restrict access to capital, which could result in the deterioration of global economic conditions deterioration.conditions.
In addition, a deterioration in macroeconomic conditions could require us to reassess the value of goodwill on certain of our assets, recorded as the difference between the fair value of the net assets of business acquired and its purchase price. This goodwill is subject to impairment tests on an annual basis. The weakening macroeconomic conditions in the countries in which we operate and/or a significant difference between the performance of an acquired company and the business case assumed at the time of acquisition could require us to write down the value of the goodwill or portion of such value. See note 1817 to the consolidated financial statements.
Political and social risks
Political and governmental instability could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
Tensions in Russia’s relations with other countries and world bodies or conflictsany change in the Russian Government or its programs or lack of consensus between the governmentRussian President, the Prime Minister, the Russian Government, the Parliament and powerful business groupspolitical, social, religious, regional, economic or among such businessethnic groups, as well as the continuation of and the development of international sanctions imposed on Russian institutions, organizations and individuals could disrupt or reverse political, economic and regulatory reforms and also lead to restrictions on our business and a negative impact on Russia’s economy and investment climate.
In January 2020, the Russian President Vladimir Putin proposed a number of constitutional reforms aimed at altering the balance of power between the legislative, executive and judicial branches and introducing certain other changes to the Constitution of the Russian Federation. It is expected that the process by which these reforms will be prepared and approved by the Russian authorities and/or the Russian population will be determined in the near future. If and when implemented, these constitutional reforms may have a significant impact on the Russian political landscape and regulatory environment and lead to other changes that are currently difficult to predict.
Any disruption or reversal of reform policies or economic downturn could lead to social, political or governmental instability or the occurrence of conflicts between various groups, which could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our shares and ADSs and impede our efforts to restructure our indebtedness.ADSs.
Corruption and negative publicity could negatively impact our business and the value of our shares and ADSs.
The local press and international press have reported high levels of corruption in Russia, including unlawful demands by government officials and the bribery of government officials for the purpose of initiating investigations by government agencies. Press reports have also described instances in which government officials engaged in selective investigations and prosecutions to further the commercial interests of certain government officials or certain companies or individuals. In addition, there are reports of the Russian media publishing disparaging articles in return for payment. From time to time, we are the subject of press reports that we believe contain false information about our business and financial condition, as well as our largest shareholder. If we or our managers, largest shareholder or counterparties are accused of involvement in government corruption or are otherwise the subject of libelous reports in the press, the resulting negative publicity could disrupt our ability to conduct our business and impair our relationships with customers, suppliers, creditors and other parties, which could have a material adverse effect on our business, financial condition and results of operations and the value of our shares and ADSs and impede our efforts to restructure our indebtedness.ADSs.
Shortage of skilled Russian labor could materially adversely affect our business, financial condition, results of operations and prospects.
Currently the Russian labor market suffers from a general shortage of skilled and trained workers, and we compete with other Russian companies to hire and retain such workers. In Russia, the working age population has declined due to a relatively low birth rate atfrom the end of the 1980s and through the early 1990s. As of January 1, 2018,2020, Rosstat estimated Russia’s population at 146.9146.8 million, a decline of 1.61.7 million from 1992. In recent years, declines in population levels slowed down as a result of an increase in migration and a reduction in the natural decline of the population; in 2014-2017, the population level in fact increased. However, the birth rate remains relatively low, which together with the aging and high mortality of the population, isare the main problem ofchallenges for Russia’s demographic development. According to World Bank, Russia’s working age population is estimatedpredicted to decline by10-13 an estimated 11 million by 2025.2030. In this context, Russia has recently increased the working age for both men and women. A shortage of skilled Russian labor combined with restrictive immigration policies could materially adversely affect our business, financial condition, results of operations and prospects.
Legal risks and uncertainties
Deficiencies in the legal framework relating to subsoil licensing subject our licenses to the risk of governmental challenges and, if our licenses are suspended or terminated, we may be unable to realize our reserves, which could materially adversely affect our business, financial condition, results of operations and prospects.
Most of the existing subsoil licenses in Russia date from the Soviet era. The Russian government enacted the Procedure for Subsoil Use Licensing on July 15, 1992, which came into effect on August 20, 1992 (the “Licensing Regulation”). As was common with legislation of this time, the Licensing Regulation was passed without adequate consideration of transition provisions and contained numerous gaps. In an effort to address the problems in the Licensing Regulation, the Ministry of Natural Resources (the “MNR”) issued ministerial acts and instructions that attempted to clarify and, in some cases, modify the Licensing Regulation. Many of these acts contradicted the law and were beyond the scope of the MNR’s authority, but subsoil licensees had no option but to deal with the MNR in relation to subsoil issues and comply with its ministerial acts and instructions. Thus, it is possible that licenses applied for and/or issued in reliance on the MNR’s acts and instructions could be challenged by the prosecutor general’s office as being invalid. In particular, deficiencies of this nature subject subsoil licensees to selective and arbitrary governmental claims.
Legislation on subsoil rights still remains internally inconsistent and vague, and the regulators’ acts and instructions are often arguably inconsistent with legislation. Subsoil licensees thus continue to face the situation where both failing to comply with the regulator’s acts and instructions and choosing to comply with them places them at the risk of being subject to arbitrary governmental claims, whether by the regulator or the prosecutor general’s office. Our competitors may also seek to deny our rights to develop certain natural resource deposits by challenging our compliance with tender rules and procedures or compliance with license terms.
An existing provision of the law that a license may be suspended or terminated if the licensee does not comply with the “significant” or “material” terms of a license is an example of such a deficiency in the legislation. The MNR (including its successor agency since May 13, 2008, the Ministry of Natural Resources and Ecology) has not issued any interpretive guidance on the meaning of these terms. Similarly, under Russia’s civil law system, court decisions interpreting these terms do not have any precedential value for future cases and, in any event, court decisions in this regard have been inconsistent. These deficiencies result in the regulatory authorities, prosecutors and courts having significant discretion over enforcement and interpretation of the law, which may be used to challenge our subsoil rights selectively and arbitrarily.
Moreover, during the tumultuous period of the transformation of the Russian planned economy into a free market economy in the 1990s, documentation relating to subsoil licenses was not properly maintained in accordance with administrative requirements and, in many cases, was lost or destroyed. Thus, in many cases, although it may be clearly evident that a particular enterprise has mined a licensed subsoil area for decades, the historical documentation relating to its subsoil licenses may be incomplete. If, through governmental or other challenges, our licenses are suspended or terminated we would be unable to realize our reserves, which could materially adversely affect our business, financial condition, results of operations and prospects.
Weaknesses relating to the Russian legal system and legislation create an uncertain investment climate.
Russia is still developing the legal framework required to support a market economy. The following weaknesses relating to the Russian legal system create an uncertain investment climate and result in risks with respect to our legal and business decisions:
inconsistencies betweenamong federal laws, including among decrees, orders and regulations issued by the Russian President, the Russian government, federal ministries and regulatory authorities and among the Constitution, federal laws, presidential decrees and governmental, ministerialregional and local orders, decisions, resolutionslaws, rules and other acts;regulations;
limited judicial and regulations resulting in their ambiguities and inconsistencies;
uncertainties in interpretation of judges in interpretingRussian legislation and contradictory judicial interpretations of the law;corporate law generally by Russian courts;
still-developing bankruptcy procedures that are subject to abuse. See “— Risks Relating to Our Financial Condition and Financial Reporting — We may become subject to bankruptcy procedures, which may result in the inability of holders of our shares and ADSs to recover anysome or all of their investments.”
All of these weaknesses could affect our ability to protect our rights under our licenses and under our contracts, or to defend ourselves against claims by others. We make no assurances that regulators, judicial authorities or third parties will not challenge our compliance with applicable laws, decrees and regulations.
One or more of our subsidiaries could be forced into liquidation on the basis of formalnon-compliance with certain requirements of Russian law, which could materially adversely affect our business, financial condition, results of operations and prospects.
Certain provisions of Russian law may allow a court to order liquidation of a Russian legal entity on the basis of its formalnon-compliance with certain requirements during formation, reorganization or during its operation. There have been cases in the past in which formal deficiencies in the establishment process of a Russian legal entity ornon-compliance with provisions of Russian law have been used by Russian courts as a basis for liquidation of a legal entity. For example, under Russian corporate law, if a Russian company’s net assets calculated on the basis of the Russian accounting standards at the end of its third or any subsequent financial year, fall below its share capital, the company must decrease its share capital to the level of its net assets value or initiate a voluntary liquidation. In addition, if a Russian company’s net assets calculated on the basis of the Russian accounting standards at the end of its second or any subsequent financial year, fall below the minimum share capital required by law, the company must initiate voluntary liquidation not later than six months after the end of such financial year. If the company fails to comply with either of the requirements stated above within the prescribed time limits, the company’s creditors may accelerate their claims and demand reimbursement of applicable damages, and governmental authorities may seek involuntary liquidation of the company. Certain Russian companiesCurrently, we have the following significant subsidiaries with negative net assets mainly due to very low historical asset values reflected on their balance sheets prepared in accordance with the Russian accounting standards; however, their solvency, i.e., their ability to pay debts as they become due, is not otherwise adversely affected by such negative net assets. Currently, we have the following subsidiaries with total liabilities greater than total assets:standards: Mechel-Steel Management, Mechel Trading House, Kaslinsky Architectural Art Casting Plant, Port Kambarka, VtorResource, Metallurgshakhtspetsstroy, Southern Kuzbass Coal Company, Mechel Mining Management, Shakhtspetsstroy, Resurs-Ugol, Romantika, Port Mechel Vanino,Sky-Extra,Mechel-Remservice, Mechel-BusinessService, Maritime Cargo Shipping, Mecheltrans Management, MecheltransVostok, Izhstal, Mecheltrans Auto, Vyartsilya Metal Products Plant, Southern Kuzbass Power Plant and Mechel Vtormet.Yakutugol.
If involuntary liquidation were to occur, then we may be forced to reorganize the operations we currently conduct through the affected subsidiaries. Any such liquidation could lead to additional costs, which could materially adversely affect our business, financial condition, results of operations and prospects.
Selective government action could have a material adverse effect on the investment climate in Russia and on our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
Governmental authorities in Russia have a high degree of discretion. Press reports have cited instances of Russian companies and their major shareholders being subjected to government pressure through prosecutions of violations of regulations and legislation which are either politically motivated or triggered by competing business groups.
Inmid-2008, Mechel came under public criticism by the Russian government. Repeatedgovernment with repeated statements were made accusing Mechel of using tax avoidance schemes and other improprieties. Ultimately the allegations regarding tax avoidance were not confirmed by the tax authorities, but the antimonopoly investigation resulted in the imposition of a fine and the issuance of a FAS directive regarding our business practices. See “— Risks Relating to Our Business and Industry — Antimonopoly regulation could lead to sanctions with respect to the subsidiaries we have acquired or established or our prices, sales volumes and business practices.”
Selective government action, if directed at us or our largest shareholder, could have a material adverse effect on our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
Due to still-developing law and practice related to minority shareholder protection in Russia, the ability of holders of our shares and ADSs to bring, or recover in, an action against us may be limited.
In general, minority shareholder protection under Russian law derives from supermajority shareholder approval requirements for certain corporate actions, as well as from the ability of a shareholder to demand that the company purchase the shares held by that shareholder if that shareholder voted against or did not participate
in voting on certain types of actions. Russian law does not expressly require obtaining prior consent for interested party transactions, unless persons specified by the law do not require it. See “Item 10. Additional Information — Description of Capital Stock — Rights attaching to common shares.” Disclosure and reporting requirements have also been enacted in Russia. Concepts similar to the fiduciary duties of directors and officers to their companies and shareholders are also expected to be further developed in Russian legislation; for example, amendments to the Russian Code of Administrative Offenses imposing administrative liability on members of a company’s board of directors or management board for violations committed in the maintenance of shareholder registers and the convening of general shareholders’ meetings. While these protections are similar to the types of protections available to minority shareholders in U.S. corporations, in practice, the enforcement of these and other protections has not been effective.
The supermajority shareholder approval requirement is met by a vote of 75% of all voting shares that are present at a general shareholders’ meeting. Thus, controlling shareholders owning less than 75% of the outstanding shares of a company may hold 75% or more of the voting power if enough minority shareholders are not present at the meeting. In situations where controlling shareholders effectively have 75% or more of the voting power at a general shareholders’ meeting, they are in a position to approve amendments to a company’s charter, reorganizations, significant sales of assets and other major transactions, which could be prejudicial to the interests of minority shareholders. See “— Risks Relating to Our Business and Industry — The concentration of our shares with our largest shareholders will limit your ability to influence corporate matters and transactions with largest shareholders may present conflicts of interest, potentially resulting in the conclusion ofentering into transactions on less favorable terms than could be obtained inon arm’s length transactions.basis.”
Shareholder liability under Russian legislation could cause us to become liable for the obligations of our subsidiaries.
The Civil Code and the Joint-Stock Companies Law generally provide that shareholders in a Russian joint-stock company are not liable for the obligations of the joint-stock company and bear only the risk of loss of their investment. This may not be the case, however, when one entity is capable of determining decisions made by
another entity. The entity capable of determining such decisions is deemed an “effective parent.” The entity whose decisions are capable of being so determined is deemed an “effective subsidiary.” Under the Joint-Stock Companies Law, an effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in carrying out these decisions if:
this decision-making capability is provided for in the charter of the effective subsidiary or in a contract between such entities; and
the effective parent gives obligatory directions to the effective subsidiary based on the above-mentioned decision-making capability.
In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt due to the fault of an effective parent resulting from its action or inaction. This is the case no matter how the effective parent’s ability to determine decisions of the effective subsidiary arises. For example, this liability could arise through ownership of voting securities or by contract. Other shareholders of the effective subsidiary may claim compensation for the effective subsidiary’s losses from the effective parent which caused the effective subsidiary to take action or fail to take action knowing that such action or failure to take action would result in losses. Accordingly, we could be liable in some cases for the debts of our subsidiaries. This liability could have a material adverse effect on our business, financial condition, results of operations and prospects.
Shareholder rights provisions under Russian law could result in significant additional obligations on us.
As a general rule, Russian law provides that shareholders that vote against or do not participate in voting on certain matters have the right to request that the company redeem their shares at value determined in accordance with Russian law. The decisions of a general shareholders’ meeting that trigger this right include:
decisions with respect to a reorganization;
consent or subsequent approval by shareholders of a “major transaction,” which involves property in excess of 50% of the balance sheet value of the company’s assets calculated according to the Russian accounting standards, regardless of whether the transaction is actually consummated (including those which are simultaneously interested party transactions), except for transactions undertaken in the ordinary course of business;
the amendment of the company’s charter or approval of a new version of the company’s charter that limits shareholder rights; and
the amendment of the public company’s charter which eliminates indication that the company is public, simultaneously with the decision on applying to the CBR on release from obligation to disclose information under the laws of the Russian Federation on securities and the decision on applying for delisting of shares and securities convertible into shares.
Our and our Russian subsidiaries’ obligation to purchase shares in these circumstances, which is limited to 10% of our or the subsidiary’s net assets, respectively, calculated in accordance with the Russian accounting standards at the time the matter at issue is voted upon, could have a material adverse effect on our business, financial condition, results of operations and prospects due to the need to expend cash on such obligatory share purchases.
The lack of a central and rigorously regulated share registration system in Russia may result in improper record ownership of our shares and ADSs.
Ownership of Russian joint-stock company shares (or, if the shares are held through a nominee or custodian, then the holding of such nominee or custodian) is determined by entries in a share register and is evidenced by extracts from that register. Currently, there is no single central registration system in Russia. Share registers can
be maintained only by licensed registrars located throughout Russia. Regulations have been adopted regarding the licensing conditions for such registrars, as well as the procedures to be followed by licensed registrars when performing the functions of registrar. In practice, however, these regulations have not been strictly enforced, and registrars generally have relatively low levels of capitalization and inadequate insurance coverage. Moreover, registrars are not necessarily subject to effective governmental supervision. Due to the lack of a central and rigorously regulated share registration system in Russia, transactions in respect of a company’s shares could be improperly or inaccurately recorded, and share registration could be lost through fraud, negligence or oversight by registrars incapable of compensating shareholders for their misconduct. This creates risks of loss not normally associated with investments in other securities markets. Furthermore, the depositary, under the terms of the deposit agreements governing record keeping and custody of our ADSs, is not liable for the unavailability of shares or for the failure to make any distribution of cash or property with respect thereto due to the unavailability of the shares. See “Item 10. Additional Information — Description of Capital Stock — Registration and transfer of shares.”
Characteristics of and changes in the Russian tax system could materially adversely affect our business, financial condition, results of operations and prospects and the value of our shares and ADSs.
Generally, Russian companies are subject to numerous taxes. These taxes include, among others:
income tax;
value-added tax (“VAT”);
mineral extraction tax; and
property and land taxes.
Laws related to these taxes have been in force for a short period relative to tax laws in more developed market economies and few precedents with regard to the interpretation of these laws have been established. Global tax reforms commenced in 1999 with the introduction of Part One of the Tax Code of the Russian Federation, as amended (the “Russian Tax Code”), which sets general taxation guidelines. Since then, Russia has been in the process of replacing legislation regulating the application of major taxes such as the corporate profitincome tax, VAT and property tax with new chapters of the Russian Tax Code.
In practice, the Russian tax authorities generally interpret the tax laws in ways that rarely favor taxpayers, who often have to resort to court proceedings to defend their position against the tax authorities. Events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretations of the legislation and assessments. Contradictory interpretations of tax regulations exist within government ministries and organizations at the federal, regional and local levels, creating uncertainties and inconsistent enforcement. Tax declarations and documentation such as customs declarations, are subject to review and investigation by relevant authorities, which may impose severe fines, penalties and interest charges. Generally, in a tax audit, taxpayers are subject to inspection with respect to the three calendar years which immediately preceded the year in which the audit is carried out. Previous audits do not completely exclude subsequent claims relating to the audited period because Russian tax law authorizes upper-level tax inspectorates tore-audit taxpayers which were audited by subordinate tax inspectorates. In addition, on July 14, 2005, the Russian Constitutional Court issued a decision that allows the statute of limitations for tax liabilities to be extended beyond the three-year term set forth in the tax laws if a court determines that a taxpayer has obstructed or hindered a tax audit. As a result of the fact that none of the relevant terms are defined, tax authorities may have broad discretion to argue that a taxpayer has “obstructed” or “hindered” a tax audit and ultimately seek back taxes and penalties beyond the three year term. In some instances, new tax regulations have been given retroactive effect.
Since May 2009, in connection with the proposal expressed by the Russian President in his Budget Message regarding the budget policy for 2010-2012, an overhaul of the anti-avoidance mechanism of double tax treaties
has begun. In November 2014, Russian legislation was significantly revised in order to prevent unlawful usethe misuse oflow-tax jurisdictions for tax evasion in the Russian Federation. The amendmentsChanges in the legislation set out the rules for the taxation of income of a foreign organization that is deemed to berecognized as a controlled foreign company. ASuch foreign organization is recognized as a controlled foreign company if it is not a tax resident of the Russian Federation, and the participation interest of the controlling Russian legal entities or individuals in the organization is more than 25% (in some cases, more than 10%). The transition period provides for a gradual reduction in the size ofnon-taxable profit, in particular, 50 million rubles, 30 million rubles and 10 million rubles for 2015, 2016 and 2017 and thereafter, respectively. Starting with the calculation of the profits of controlled foreign companies for 2015, these changes2017 and thereafter, profits in the amount of not more than RUB 10 million are not subject to income tax. Russian tax regulations could increaselaw also provides for certain conditions under which the income of controlled companies qualifies as tax burden on companies which are recognizedexempt. The taxable income of the controlling party is increased by the profits of the controlled foreign company earned in the financial year ended prior to be controlling of foreign companies.the reporting year. In addition, Russian companies are required to disclose information about controlled foreign companies to the Russian tax authorities. All of these measures are intended to ensure the transparency of economic transactions, including foreign trade transactions. Disclosure of beneficial ownership, beneficial recipients of income and tax residence of legal entities at their actual place of business is, according to the new legislation, a prerequisite for the application of tax preferences, including reduced tax rates under international double tax treaties. In July 2015, the Convention on Mutual Administrative Assistance in Tax Matters became effective. The Convention provides for the potential exchange of tax information, including simultaneous tax inspections with Member States of the Council of Europe and member countries of the Organization for EconomicCo-operation and Development (OECD)(“OECD”), which signed the convention, as well as for assistance in the collection of taxes on their territories. Furthermore, starting from June 30, 2014, the Federal LawNo. 173-FZ entered into force, which regulates the procedure of interaction of financial market entities with foreign tax authorities, primarily within the bounds of the U.S. law Foreign Account Tax Compliance Act (FATCA)(“FATCA”).
On November 16, 2011, the Russian President signed the Law on Amendment of Part One and Part Two of the Tax Code of the Russian Federation in Connection with the Formation of a Consolidated Group of Taxpayers. The main provisions of the law came into force on January 1, 2012. The law provides for formation of a consolidated group of taxpayers for the purposes of profitincome tax calculation and payment on the basis of the combined business performance of the members of such group. However, the law sets forth a number of requirements for the formation of a consolidated group of taxpayers. Starting from 2013, 16 companies of our group have formed a consolidated group of taxpayers, with Mechel being a responsible party. The formation of the consolidated group of taxpayers allowed us to determine the taxable income with profit and loss offset of all the companies included in the consolidated group of taxpayers and to pay profitincome tax from total aggregate income under the consolidated group of taxpayers, starting from January 1, 2013. In 2014, there have been some changes in the composition of the consolidated group of taxpayers as a result the number of members has increased to 20 companies. Due to changes inUnder current Russian tax legislation, the consolidated tax base does not include any profit received from controlled foreign companies by a member of the consolidated group of taxpayers (such member being the controlling entity of such controlled foreign companies and the responsible party for paying profitincome tax in respect of the profits of controlled foreign companies irrespective of the profitincome tax of the consolidated group of taxpayers).
However, regardless of being a member of the consolidated group of taxpayers or not, Mechel and our Russian subsidiaries pay Russian taxes on dividends they receive from other companies in our group. The tax rate on dividend income amounts to 0% or 13% (depending on whether the recipient of dividends qualifies for Russian participation exemption rules) if being distributed to Russian companies, and 15% (or lower, subject to benefits provided by relevant double tax treaties) if being distributed to foreign companies which are not controlled foreign companies. Dividends from foreign companies to Russian companies are subject to a tax of 13%. Taxes paid in foreign countries by Russian companies may be offset against payment of these taxes in the Russian Federation up to the maximum amount of the Russian tax liability. In order to apply the offset, the company is required to confirm the payment of taxes in the foreign country. The confirmations must be authorized by the tax authority of the foreign country if taxes were paid by the company itself, and the confirmation must be authorized by the tax agent if taxes were withheld by the tax agent under foreign tax law or an international tax agreement.
In 2017, due to changes in Russian tax legislation, the order ofset-off of tax loss accumulated by Russian companies, including companies within the consolidated group of taxpayers significantly changed. Such changes may leadhave led to an increase in the Mechel’s tax burden. During the period from 2017 to 2020,2021, the amount of recognized loss for previous tax periods cannot exceed 50% of the tax base of the current period. Since 2021,It is possible that this limitation will ceasecontinue to apply and the recognition offurther, which will not allow recognizing accumulated losses in full will be possible again.full. At the same time, the currentpreviously existing10-year limit on the transfer of losses iswas cancelled.
The limitation in the amount of recognized loss is also applied to the members of the consolidated group of taxpayers with respect to current year loss of its members. Such limitation equals to 50% of the consolidated tax base of the consolidated group of taxpayers for the current reporting (tax) period. In respect of losses incurred in previous tax periods (before January 1, 2017), the consolidated tax base of the current tax period may be reduced by the amount of such losses, but also by no more than 50%. These changes in accounting the loss of the consolidated group of taxpayers increasehave increased the tax burden on companies included in the consolidated group of taxpayers.
In 2018, Russian tax law introduced an indefinite ban on the registration by the tax authorities of agreements on the formation of a consolidated group of taxpayers, the extension of their validity and the introduction of changes related to the accession of new members or withdrawal from the consolidated group of taxpayers, unless such member ceases to comply with tax legislation requirements. In addition, January 1, 2023 is the expiration date of all agreements on the formation of a consolidated group of taxpayers.
In addition, application of current Russian thin capitalization rules and the developing negative court practice on such disputes, especially at the level of the Presidium of the Supreme Arbitrazh Court of the Russian Federation and the Supreme Court of the Russian
Federation, may require us to withhold dividend taxes in Russia upon payment of interest on loans. In particular, taking into account the requirements of Russian law and negative court practice on thin capitalization, part of the interest on borrowings of our subsidiaries which are either received from Mechel or received from independent banks and guaranteed by Mechel may be classified as dividends and may not be treated as expenses for tax purposes under certain conditions provided by thin capitalization rules. In February 2016, a law which significantly changes the current approach to thin capitalization rules application was adopted. We believe that thin capitalization rules are not applicable to Mechel’s loans starting from May 2016. However, there couldcan be no assurance that in case of a change of the existing thin capitalization rules and the applicable practice, we will not be subject to the risks specified above.
In accordance with amendments to the Russian Tax Code which entered into force on November 30, 2016, the tax authorities are entitled to seek in court payment of taxes by the company’s dependent persons, including dependent individuals, for example, the owners, founders or shareholders of such company, if these persons received cash or property from the company which has outstanding tax amounts within the amounts received by them. Taking into account the requirements of Russian law and negative court practice at the level of the Constitutional Court of the Russian Federation, there couldcan be no assurance that we will not be subject to the risks specified above.
The foregoing conditions create tax risks in Russia that are more significant than typically found in countries with more developed tax systems, imposing additional burdens and costs on our operations, including management resources. In addition to our tax burden, these risks and uncertainties complicate our tax planning and related business decisions, potentially exposing us to significant fines and penalties and enforcement measures despite our best efforts at compliance. See also “— Risks Relating to the Russian Federation — Legal risks and uncertainties — Selective government action could have a material adverse effect on the investment climate in Russia and on our business, financial condition, results of operations and prospects and the value of our shares and ADSs.”
Ability to fully utilize our recognized deferred tax assets within the consolidated group of taxpayers depends on the group’s profitability and future cash flows.
As of December 31, 2019, we had RUB 3,648 million recorded as deferred tax assets on the consolidated statement of financial position primarily due to the expectation of future profits of the consolidated group of taxpayers. The deferred tax assets can be utilized only if, and only to the extent that, we generate adequate levels of taxable income in future periods to offset the tax loss carry forwards and reverse the temporary differences prior to expiration.
Our management estimates future taxable income in accordance with the tax laws applicable to the consolidated group of taxpayers. In addition, assumptions regarding the future recoverability of deferred tax assets depend on general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If the consolidated group of taxpayers generate lower taxable income than the amount we have assumed in determining our deferred tax assets, or the tax authorities impose significant additional tax assessments as a result of changes in income tax regulations and we are unable to successfully challenge them in court or make adjustments provided by these regulations, the value of deferred tax assets will be reduced, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Differences in interpretation of transfer pricing rules in the jurisdictions in which we operate, as well as the lack of developed law enforcement practice with regard to the Russian transfer pricing rules expose our business to the risk of significant additional liabilities.
Transfer pricing rules control related party transactions pricing. The fundamental principle of the rules is the ‘arm’s length’ principle, according to which organizations must enter into transactions with related parties on the same terms as they would enter into transactions with independent parties. Transfer pricing rules introduce specific pricing methods, and documentation requirements for proving market prices.
Transfer pricing rules apply in most countries in which we operate. Many countries participating in the OECD employ a unified approach to transfer pricing, however in certain jurisdictions, including Russia, where transfer pricing rules have been in force since 2012, the rules have some specifics. As such, the tax authorities of different countries can take advantage of the ambiguous interpretation of transfer pricing rules which can lead to claims on their part or additional tax inspections. The Russian transfer pricing rules that entered into force on January 1, 2012 should help to achieve consistency between domestic rules and the OECD principles.
The Russian transfer pricing rules require taxpayers to notify the tax authorities on controlled transactions that are performed from January 1, 2012. Controlled transactions mean any transactions between related parties both domestic and cross-border as well as certain transactions between unrelated parties. The rules introduce specific pricing methods, and documentation requirements for proving market prices. CurrentlyIn Russia, established practice in applying the rules has only startsstarted to develop and in some cases decisions are being pronounced not in favor of taxpayers, therefore we cannot predict what effect the transfer pricing rules will have on our business. If the tax authorities of Russia or other countries impose significant additional tax assessments as a result of changes in transfer pricing regulation and we are unable to successfully challenge them in court or make symmetrical adjustments provided by these rules, it could have a material adverse effect on our business, financial condition, results of operations and prospects.
In many OECD countries, there is a legislatively established procedure for the application of mutual agreement procedures with tax authorities of foreign countries, which are aimed at eliminating different interpretations of transfer pricing rules and double taxation of parties of transactions. Under Russian law, the regulations related to mutual agreement procedures begin to apply only since January 1, 2020. Consequently, Russian companies will not be able to make adjustments, in case of additional accruals of income/reduction of expenses to foreign counterparties, on transactions entered into before January 1, 2020.
In 2015, OECD issued Guidance on the Implementation of Transfer Pricing Documentation andCountry-by-Country Reporting, which recommended the introduction of a three-tiered reporting system for multinational enterprise groups, consisting of a Master File, a Local File and aCountry-by-Country Report (“CbC Report”). These reporting requirements were incorporated into the legislation of many countries of our presence and apply to all periods starting from 2017.
The group’s CbC Report is prepared by Mechel with submission to the competent authorities in the Russian Federation. In accordance with international treaties, the automatic exchange of CbC reports exists between the countries participating in the automatic exchange. The lack of clarifications on further use of the data provided in the CbC Report may lead to additional tax inspections being initiated, the results of which could have a material adverse effect on our business.
Expansion of limitations on foreign investment in strategic sectors could affect our ability to attract and/or retain foreign investments.
On April 29, 2008,Our group is subject to limitations imposed by Russian legislation that restricts the rights of foreign entities to invest in certain Russian companies and in the subsoil sector under the Strategic Investment Laws of the Russian Federation, including the Federal Law “On the Procedure for Foreign Investment in Companies with Strategic Impact on the National Defense and Security of the Russian Federation” was adopted. See “Item 4. Information on the Company — Regulatory Matters — The (the “Strategic Industries Law.Law”
). As at the date hereof, our subsidiarysubsidiaries Southern Urals Nickel Plant, which holds the subsoil license on land plots with nickel and cobalt ore deposits, which are included in the official list of subsoil plots of federal importance published on March 5, 2009 in the Russian official newspaperRossiyskaya Gazeta as amended (the “Strategic Subsoil List”), it qualifies as a Strategic Company and is subject to special regulation. Our subsidiaries Urals Stampings Plant and Port Posiet which are included in the register of natural monopolies and therefore are also Strategic Companies. Furthermore, entities producing and distributing industrial explosives are deemed to be Strategic Companies. Thus, our subsidiaries Yakutugol, Vzryvprom and Korshunov Mining Plant also qualify as Strategic Companies, as theywhich hold licenses to carry out activities related to the handling of industrial explosives.explosives are considered Strategic Companies.
Therefore, any transfer, directly or indirectly, to a foreign investor or its group of entities (except for the transfer to a foreign investor controlled by the Russian Federation, the constituent entity of the Russian Federation and/or Russian nationals provided such Russian nationals are Russian tax residents and do not have other nationality) of a stake or certain rights in or fixed assets (equal to 25% or more of the balance sheet value of the relevant entity) of Southern Urals Nickel Plant, Yakutugol, Vzryvprom, Korshunov Mining Plant, Urals Stampings Plant and Port Posiet, which, according to the Strategic Industries Law, is deemed to transfer control, as described in “Item 4. Information on the Company — Regulatory Matters — The Strategic Industries Law,” will be subject to prior approval from the state authorities. Likewise, a sale to a foreign investor or its group of entities of a stake in Mechel which provides control (as defined in the Strategic Industries Law) over Southern Urals Nickel Plant, Yakutugol, Vzryvprom, Korshunov Mining Plant, Urals Stampings Plant and Port Posiet, will also be subject to prior approval in accordance with the Strategic Industries Law.
In addition, in case a foreign investor or its group of entities which is a holder of securities of Southern Urals Nickel Plant, Yakutugol, Vzryvprom, Korshunov Mining Plant, Urals Stampings Plant and Port Posiet, becomes a holder of voting shares in amount which is considered to give them direct or indirect control over these companies in accordance with the Strategic Industries Law due to the allocation of voting shares as a result of certain corporate procedures provided by Russian law (e.g., as a result of abuy-back by the relevant company of its shares, conversion of preferred shares into common shares, or holders of preferred shares becoming entitled
to vote at a general shareholders’ meeting in cases provided under Russian law), such shareholders will have to apply for approval within three months after they acquired such control.
Furthermore, starting from July 2017, the Strategic Industries Law was amended so that production and sale of metals, alloys with special features or raw materials that are used in production of weapons and military equipment is also deemed a strategic activity. Considering the fact that the amendments are vague and ambiguous and may be construed broadly, certain other our group companies may be qualified as Strategic Companies.
In this connection, there is a risk that the requirement to receive prior or subsequent approvals and the risk of not being granted such approvals might affect our ability to attract foreign investments, create joint ventures with foreign partners with respect to our companies that qualify as Strategic Companies or effect restructuring of our group which might, in turn, materially adversely affect our business, financial condition, results of operations and prospects.
For a more detailed discussion of implications of the Strategic Investment Laws, see “Item 4. Information on the Company — Regulatory Matters — The Strategic Industries Law.”
Land use rights regulation in Russia is subject to uncertainty and contradiction.
The main law governing the title to land is the Land Code of the Russian Federation introduced by the Federal Law “On Introduction of the Land Code,” dated October 25, 2001, as amended (the “Land Code”), which establishes the principles of land legislation and determines relations governed by land legislation.
Starting from 2015, the Land Code and a number of other legislative acts regulating the land use have been significantly amended in part concerning the procedure for allotment of land plots by public authorities to citizens and legal entities. Law enforcement practice, taking into account changes in the applicable legislation, is currently under development; therefore, risks associated with uncertainty of regulatory aspects of the allotment of land plots by public authorities exist.
In addition, there is a general risk of seizure of land plots for state needs for the implementation of governmental programs and projects, which means creation and construction of complexes within the framework of such federal programs. Moreover, if the land plots owned or leased by us are found not to be in compliance with all applicable approvals, consents, registrations or other regulations, we may lose the use of such land plots.
The ambiguous interpretation of land law and/or a potential seizure of our land plots for state needs or for other reasons may have a material adverse effect on our business, financial condition, results of operations and prospects.
Item 4. Information on the Company
Overview
We are a vertically integrated group with revenues of RUB 296,567 million in 2019, RUB 312,574 million in 2018 and RUB 299,113 million in 2017, RUB 276,009 million in 2016 and RUB 253,141 million in 2015, with operations organized into three industrial segments: mining, steel and power, each of which has a management company that performs the functions of respective executive management bodies of the companies within the segment, as described below. For information on our key subsidiaries, see “Item 5. Operating and Financial Review and Prospects — Business Structure.”
Our group includes a number of logistical and marketing companies that help us to deliver and market our products. We have freight seaports in Russia on the Sea of Japan (Port Posiet) and on the Sea of Azov (Port Temryuk) and, as well as a freight river port on the Kama River, a tributary of the Volga River in central Russia (Port Kambarka). We have a fleet of freight railcars, locomotives and long-haul trucks, and operate a rail line to our Elga coal deposit in the Sakha Republic.
We have a network of overseas subsidiaries, branches, warehouses, service centers and agents to market our products internationally, and we have a Russian domestic steel retail and service subsidiary with regional offices in 4541 cities throughout Russia.
Mechel PAO is a public joint-stock company incorporated under the laws of the Russian Federation. From the date of our incorporation on March 19, 2003 until July 19, 2005, our corporate name was Mechel Steel Group OAO. We conduct our business through a number of subsidiaries. We are registered with the Federal Tax Service of the Russian Federation under the main state registration number (OGRN) 1037703012896. Our principal executive offices are located at Krasnoarmeyskaya Street 1, Moscow 125167, Russian Federation. Our telephone number is +7 495 221 8888. Our Internet addresses arewww.mechel.com andwww.mechel.ru. Information posted on our website is not a part of this document. We have appointed CT Corporation System, located at 111 Eighth Avenue,28 Liberty Street, New York, New York 10011,10005, as our authorized agent upon which process may be served for any suit or proceeding arising out of or relating to our shares, ADSs or the deposit agreements.
Mining Segment
Our mining segment produces metallurgical coal (coking coal, PCI and anthracite), steam coal, iron ore and iron ore concentrate, coke and chemical products.
The segment primarily consists of our coal, iron ore and coke production facilities in Russia. It also includes certain transportation and logistics facilities and engineering operations.
Our subsidiary Southern Kuzbass Coal Company and its subsidiaries operate coal mines located in the Kuznetsky basin, near Mezhdurechensk in Western Siberia. These mines include four open pit mines and three underground mines. Another of our subsidiaries, Yakutugol, operates coal mines located in the Sakha Republic in Eastern Siberia, consisting of three open pit mines. Yakutugol also holds subsoil licenses for three iron ore deposits, located in close proximity to its coal mining operations. In August 2013, we established Elgaugol which holds the subsoil license for the Elga coal deposit, located in the Sakha Republic in Eastern Siberia. Our mining segment also provides coal washing services to our coal mining subsidiaries.
Korshunov Mining Plant operates two open pit iron ore mines and a concentrating plant located near Zheleznogorsk-Ilimsky, a town in the Irkutsk region in Eastern Siberia.
The mining segment also produces significant amounts of coke, both for use by our subsidiaries in the steel segment and for sales to third parties. We have the flexibility to supply our own steel mills with our mining products or to sell such mining products to third parties, depending on price differentials between local suppliers and foreign and domestic customers.
In April 2008, we established Mechel Mining, a wholly-owned subsidiary, in which we consolidated coal, iron ore and coke assets of our mining segment (Southern Kuzbass Coal Company, Korshunov Mining Plant, Yakutugol, Moscow Coke and Gas Plant and Mechel Coke and certain other companies).
Mechel Mining Management, a wholly-owned subsidiary of Mechel Mining, acts as the sole executive body of our subsidiaries in the mining segment.
Steel Segment
Our steel segment produces and sells semi-finished steel products, long products of a wide range of steel grades, carbon and stainless flat steel products and high value-added metal products, including wire products, stampings and forgings, structural shapes, beams and rails.
Our steel segment production facilities in Russia include one integrated steel mill, one steel-makingsteelmaking mill, a wire products plant and stampings and forgings mill in the southern part of Ural Mountains, a wire products plant in northwestern Russia near the border with Finland and a ferrosilicon plant in Eastern Siberia. We also have a wire products plant in Lithuania.
Mechel-Steel Management, a wholly-owned subsidiary of Mechel, acts as the sole executive body of our main subsidiaries in the steel segment.
Our steel segment also includes our distribution network in Russia and abroad, which consists of Mechel Service and Mechel Service Global.
Power Segment
The power segment was formed in April 2007, when we acquired a controlling interest in Southern Kuzbass Power Plant located in Kaltan in the Kemerovo region, which sells electricity and capacity to the wholesale market. In June 2007, we acquired a controlling interest in Kuzbass Power Sales Company, the largest power distribution company in the Kemerovo region. Our power segment enables us to market high value-added products, such as electricity and heat energy, and to increasemaintain the power self-sufficiency of our mining and steel segments. Mechel Energo acts as the sole executive body of Southern Kuzbass Power Plant in our power segment.
Competitive Strengths
Our main competitive strengths are the following:
Leading mining and metals group by production volume with strong positions in key businesses
We are the second largest coking coal producer and the thirdsecond largest coking coal concentrate exporter by volume in Russia.
In 2017,2019, we were the second largest coking coal producer in Russia, with a 16.9%12.5% share of total coking coal production by volume, according to the Central Dispatching Department of Fuel and Energy Complex (“(the “Central Dispatching Department”), a Russian information agency reporting on the fuel and energy industry. In 2017,2019, our export sales of coking coal concentrate were the thirdsecond largest by volume among Russian companies, according to Metals & Mining Intelligence (“MMI”), a private information and research company.MMI.
We have a large coal reserve base and a broad-range offering of high-quality metallurgical coals, as well as steam coals of various grades.
Our total coal reserves amounted to 2,972.32,934.6 million tonnes as of December 31, 2017,2019, as accounted pursuant to SEC Industry Guide 7.
Our coal reserves allow us to supply steel producers and coke makers globally with a wide range of coal grades to make quality metallurgical coke or to use inPCI-assisted and sintering-assisted steel manufacturing. In addition to metallurgical coals, we supply steam coals of various grades. In particular, Southern Kuzbass Coal Company produces semi-hardsemi-soft and semi-softsemi-hard coking coal, PCI, anthracite and steam coal. Most of the coal grades of Southern Kuzbass Coal Company are exported. Yakutugol produceslow-volatile hard coking coal used by customers both in the Asia-Pacific region and in Russia, as well as steam coal which is sold domestically to local municipal services and electric power stations and for export. Elgaugol produces high-quality hard coking coal of high-volatile content and steam coal which are primarily supplied for export. The ability to serve our customers with a broad range of metallurgical and steam coal grades gives us a competitive advantage in entering the new markets and establishing long-term relationships with the customers.
By production volume we are Russia’s second largest producer of long steel products and Russia’s second largest producer of wire products.
According to Metal Expert, a source for global steel and raw materials market news and analytics, in 20172019 by production volume we were Russia’s second largest producer of long steel products (excluding square billets), secondfourth largest producer of reinforcement bars (rebar) and largest producer of wire rod. Our long steel products business has particularly benefited from the increased infrastructure and construction activity in Russia. Our share of Russia’s total production volume of rebar in 20172019 was 17.9%12.5%, according to Metal Expert. According to Metal Expert and Chermet, a Russian ferrous metals industry association (“Chermet”), we are Russia’s fourthsecond largest producer of special steel by production volume, accounting for 10.5%14.1% of Russia’s total special steel output in 2017.2019. Our product range in special steel is broader and more comprehensive than other Russian producers, giving us an added advantage in our markets. According to Metal Expert, we are Russia’s second largest producer of wire products by production volume, accounting for 21.5%19.2% of Russia’s total wire products output in 2017.2019.
High degree of vertical integration
Our steel segment is able to source most of its raw materials from our group companies, which provides a hedge against supply interruptions and market volatility.
We believe that our internal supplies of coke, iron ore concentrate and ferrosilicon give us advantages over other steel producers, such as higher stability of operations, better quality control of end products, reduced
production costs, improved flexibility and planning latitude in the production of our steel and value-added steel products and the ability to respond quickly to market demands and cycles. In 2017,2019, we were fully self-sufficient with respect to coke and ferrosilicon; we were approximately 71%70% self-sufficient with respect to iron ore concentrate; and we satisfied approximately 29%27% of our electricity needs internally. We believe that the level of our self-sufficiency in raw materials gives our steel business a competitive advantage.
We view our ability to source most of our inputs internally not only as a hedge against potential supply interruptions, but as a hedge against market volatility. From an operational perspective, since our mining and power assets produce the same type of inputs that our manufacturing facilities use, we are less dependent on third partythird-party vendors and less susceptible to supply bottlenecks. From a financial perspective, this also means that if the market prices of our steel segment’s inputs rise, putting pressure on steel segment margins, the margins of our mining segment will tend to increase. Similarly, while decreases in commodity prices tend to reduce revenues in our mining segment, they also create an opportunity for increased margins in our steel business.
Furthermore, we work on improving the quality of our steel products and reducing the costs for raw materials. Depending on prevailing market conditions, we evaluate the efficiency of use of our own raw materials and the raw materials purchased from third parties to be able to generate additional income.
The ability to internally source our materials also gives us better market insight when we negotiate with our outside suppliers, and improves our ability to manage our raw materials costs.
Our logistics capability allows us to better manage infrastructure bottlenecks, to market our products to a broader range of customers and to reduce our reliance on trade intermediaries.
We are committed to maximum efficiency in delivering goods to consumers and have been actively developing our own logistics network. Using our own transportation capacity enables us to save costs as we are less exposed to market fluctuations in transportation prices and are able to establish flexible delivery schedules that are convenient for our customers. Our logistics capacities are currently comprised of two seaports (Port Posiet and Port Temryuk) and a river port (Port Kambarka), as well as freight forwarding companies (Mecheltrans, MecheltransVostok and Mecheltrans Auto) which manage rail and motor transportation of our products and carry out the overall coordination of our sea, rail and motor transportation logistics. These companies not only transport our products but also provide transportation services to third parties.
We own two seaports and a river port and we have our own rail rolling stock. Port Posiet in the Russian Far East, on the Sea of Japan, gives us easy access to the Asia-Pacific seaborne market and provides a delivery terminal for the coal mined by our subsidiaries Yakutugol and Elgaugol in Yakutia. We are in the process of the Port Posiet’s modernization, which enabledwill enable us to expand the cargo-handling capacity of the port up to 7.09.0 million tonnes per annum. Port Temryuk on the Sea of Azov, an inlet of the Black Sea basin, is primarily used for coal and metal transshipment and provides us access to the emerging market economies of the Black Sea and Mediterranean basins. Port Kambarka on the Kama River in the Republic of Udmurtia (a Russian administrative region also known as Udmurtia) is connected to the Volga River basin and the Caspian Sea, by canal to the Don River and the Sea of Azov, as well as by the Volga-Baltic Route to the Baltic Sea. As of December 31, 2017,2019, our subsidiaries Mecheltrans and Mecheltrans Auto owned and leased 11,26311,114 freight transportation units, including 11,21811,069 railcars and 45 long-haul trucks that we use to ship our products.
In June 2008, pursuant to the terms of our subsoil license for the Elga coal deposit we began construction of a private rail line, which we own and control subject to applicable regulation. In December 2011, we finished laying track for the rail line in accordance with the terms of the license. The 321 kilometer-long rail line is now in operation and we are able to use it for transportation of coal currently produced at the Elga deposit. The rail line connects the Elga coal deposit with the Baikal-Amur Mainline (at the Ulak railway station), which, in turn, provides access to the Russian rail network in general,generally and access to Pacific Ocean ports, in particular. We will further develop the rail line to increase its capacity in line with our coal production plans. We anticipate that the Elga rail
line will not only provide an avenue for delivery of coal produced at the Elga coal deposit, but will eventually serve as the transport route for coal, iron ore and other raw materials mined in the adjacent deposits.
One of the lowest-cost metallurgical coal producers
According to CRU International Limited (“CRU”), our hard coking coal operations are in the first quartile of the global business cost curve (FOB basis). In 2017, approximately 93% of our coking coal production was mined from open pit mines, which we believe is one of the highest rates among our Russian competitors. Open pit coal mining is generally considered safer, cheaper and faster than the underground method of mining. Most of our mines and processing facilities have long and established operating histories. We view strict cost management and increases in productivity as fundamental aspects of ourday-to-day operations, and continually reassess and improve the efficiency of our mining operations.
Strategically positioned to supply key growth markets
Our mining and logistical assets are well-positioned to expand sales to the Asia-Pacific seaborne market.
Eastern Siberian coal mines of Yakutugol and Elga coal deposit, which are part of our mining segment, are strategically located and will enable us to expand exports of our products to key Asian markets. Yakutugol and Elgaugol are located within the shortest distance among Russian coking coal producers to Port Posiet and Port Vanino in the Russian Far East. We view the proximity of these mining and logistical assets to the Asian economies as one of the key competitive advantages which allow us to diversify our sales, provides us with additional growth opportunities and acts as a hedge in the event of a decrease in demand from customers in Russia. Moreover, due to our integration, experience and location in Russia, which has some of the largest deposits of coal and iron ore in the world, we believe we are better positioned than many of our international peers to secure future production growth. We are currently negotiating a potential sale of the Elga coal complex, for further details see “Item 4. Information on the Company — Business Strategy.”
Our steel mills are well-positioned to supply Russian infrastructure projects.
Russia is our core steel market and we have significant domestic market shares in main types of carbon and special steel long products. We believe we have established a strong reputation and brand image for Mechel within Russia, just as we have with our international customers. The location of a number of our core steel segment assets in the southern Urals positions us advantageously, from a geographical and logistical perspective, to serve the areas in the west of the Urals as this region is a large consumer of long steel products in Russia, according to Metal Expert. The construction industry has been a major source of our revenue and we have captured a large portion of the market. According to Metal Expert, our share of Russia’s total production volume of rebar in 20172019 was 17.9%12.5%.
Established distribution and sales platform
Our sales and distribution activities in relation to exports of mining products are conducted by our Swiss subsidiary Mechel Carbon. Mechel Carbon is customer oriented and experienced in the trade of metallurgical coals, steam coal, coke and chemical products. Mechel Carbon sales accounted for 75.5%77.4% of our mining segment sales and 25.3%24.3% of our total sales in 2017.2019.
We also have a distribution network consisting of Mechel Service and Mechel Service Global which conduct sales of our steel products in Russia, the CIS and Europe. Through our distribution network in Russia and the CIS we sell a whole range of steel products manufactured by our plants. In case of sales to the European Union, we focus on sales of high value-added products, primarily high-quality rolled steel products, forgings and structural shapes produced by our Urals plants, through Mechel Service Belgium. Our companies in Germany, Austria and the Czech Republic provide customers with a wide range of services for metal processing. Mechel Service and Mechel Service Global sales accounted for 49.6%50.5% of our steel segment sales and 28.6%29.8% of our total sales in 2017.2019.
Our direct access to end customers allows us to obtain real-time market intelligence and improve production planning at our steel facilities, which in turn allows us to improve the efficiency of our existing operations through the optimization of our sales structure.
Strong and focused management team
Our current management team has significant experience in all aspects of our businesses. Mr. Zyuzin, one of the founders of our group and our Chairman and largest shareholder, has led our successful transformation from a small coal trading operation to a large integrated mining and metals group. Mr. Zyuzin has over 30 years of experience in the coal mining industry and holds a Ph.D. in technical sciences in the coal mining field. Our divisional management also has long-tenured experience in the mining and metals industry. See “Item 6. Directors, Senior Management and Employees — Directors and Executive Officers.”
Business Strategy
Our goal is to becomeenhance our position of one of the largestleading producers of metallurgical coal and steel products by realizing potential of the vertical integration and maximizing synergies between our performing assets underlying our business model.
Our strategy is aimed at extracting the maximum value from our mining and steel assets. We intend to concentrate on efficiency improvements and modernization of the business lines, which we expect will increase the business’ overall profitability.
In the mining segment, we will continue to develop our existing coal reserves, particularly in order to sell more high-quality metallurgical coal and coal products to third parties. We intend to prioritize the development of the Elga coal deposit, one of the largest global metallurgical coal reserves. Our coking coal and iron ore production form a solid platform for our steel business. Steam coal can beis used to feed our power generating business which enables us to market high value-added products, such as electricity and heat energy, and to increasemaintain the power self-sufficiency of our mining and steel segments. However, even as we develop our internal sourcing capability, we intend to adhere to our long-standing approach of purchasing inputs from third partythird-party suppliers and selling products, including raw materials, to domestic and international customers to create the most advantageous profit opportunities for our group.
In the steel segment, we plan to focus on the Russian rail, engineering and construction markets. The launch of the universal rail and structural rolling mill at Chelyabinsk Metallurgical Plant allowed us to widen our portfolio of high value-added products such as structural shapes and rails, as well as significantly improve our competitive advantage as a full product range supplier to the construction sector and as an important supplier to Russian Railways. In 2015 and 2018, we successfully went through the certification of rail products in accordance with technical regulations of the Customs Union resulting in obtainmentthe issuance of threefive certificates of conformityconformity. The certificates allow free circulation of rail products imported into the territory of the Customs Union. The increase in sales volume of the universal rolling mill products will occur along with the development and certification of new types of products and will enable us to realize the import substitution strategy. We intend to increase our group’s output and improve the quality of high value-added metal products in order to preserveretain our leadership in special and stainless steels and wire products in Russia. For some of these products, we hold a unique market niche, which serves as the basis for further improvement of our market share and growth of our customer base.
Our sales and distribution network provides us with a strong platform for further development of our sales. In the current economic situation, we are capableable to quickly respond to changing market conditions and, if necessary, redirect deliveries of our products not only in Russia but also abroad, thereby allowing us to obtain additional profit.
Another strategic priority is development of our logistics capabilities. OurWe own our railcar fleet is to ensure themaintain a balance between transportation security and cost efficiency. Development of the cargo-handling capacity of Port
Posiet is crucial for continuous shipments of our coal products in the Asia-Pacific region. Growing production of export-oriented coal in our mining segment will require further expansion of port capacities on our main export routes.routes, as well as the increase in our own railcar fleet.
With a focus on improving the efficiency improvements of our main businesses, we may also consider selective disposal of assets in order to minimize possible costs, as well as attract financial or strategic investors to our key assets in order to reduce the debt burden and contribute to business development.
In August 2019, we were notified by Gazprombank of its intention to sell and received an offer to purchase a 34% stake in the Elga coal complex comprised of a 34% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 34% stake in Elga-road OOO, the owner of the Ulak-Elga rail line, and a 34% stake in MecheltransVostok OOO, the rail line’s transport operator. In January 2020, we failed to execute ourpre-emptive right to purchase the stakes as provided for by Russian law, and as a result, Gazprombank is now entitled to sell these stakes to a third party.
In December 2019, we received an offer to sell our stake in the Elga coal complex comprised of a 50.9990202673% stake in Elgaugol OOO, a 51% stake in Elga-road OOO and a 51% stake in MecheltransVostok
OOO. The Elga coal complex represented approximately 35% of the group’s assets as of December 31, 2019 and requires a substantial amount of investment, which the group is not currently in a position to provide. In January 2020, we entered into negotiations relating to disposal of the Elga coal complex to a perspective buyer, however we have not agreed any binding documentation and it is currently unclear when and if any binding documentation relating to disposal of the Elga coal complex will be executed.
Our History and Development
We trace our beginnings to a small coal tradingcoal-trading operation in Mezhdurechensk in the southwestern part of Siberia in the early 1990s. See “Item 5. Operating and Financial Review and Prospects — History of Incorporation.” Since that time, through strategic acquisitions in Russia and abroad, Mechel has developed into one of the world’sa leading mining and metals companies,company, comprising producers of coal, iron ore, coke, steel, rolled products, ferrosilicon, heat energy and electricity, with operations and assets in Russia, the CIS and Europe. We intend to retain a controlling voting interest in each of our subsidiary holding companies as we continue to build upon our business model of vertical integration among our assets.
Mining Segment
Our mining segment produces coking coal and other types of metallurgical coal (anthracite and coal for pulverized, or finely crushed, coal injection (PCI))PCI), steam coal, middlings, coking coal and steam coal concentrates, as well as coke and chemical products, iron ore and iron ore concentrate. Our mining segment also includes certain transportation and logistics facilities and engineering operations. Our coal operations consist of Southern Kuzbass Coal Company, Yakutugol and Elgaugol, which together produced 12.711.9 million tonnes of raw coking coal, 5.75.8 million tonnes of raw steam coal and 2.21.2 million tonnes of raw anthracite in 2017.2019. Our coke operations consist of Moscow Coke and Gas Plant and Mechel Coke, which together produced 2.82.6 million tonnes of coke in 2017.2019. Our iron ore operations consist of Korshunov Mining Plant which produced 8.06.5 million tonnes of iron ore and 2.5 million tonnes of iron ore concentrate in 2017.2019.
Description of key products
Coking coal and metallurgical coal. Southern Kuzbass Coal Company produces high-quality bituminous coal, which is washed to reduce the ash content. The premier product is a high-quality, low phosphorous, low sulfur semi-soft to semi-hard coking coal used to produce coke for the iron and steel industry. Other products produced by Southern Kuzbass Coal Company include PCI and anthracite. Yakutugol produces hard coking coal oflow-volatile content.content, and Elgaugol produces high-quality hard coking coal of high-volatile content.
Steam coal. Southern Kuzbass Coal Company, Yakutugol and Elgaugol produce high-energy steam coal as part of their product mix. Steam coal is primarily used for the generation of electricity in coal-fired power stations.
Coke. Coke is used in the blast furnacefurnaces as a main source of heat, as a reducing agent for iron and as a raising agent for charging material in the smelting process. It is a product prepared by pyrolysis (heating in the absence of oxygen) oflow-ash,low-phosphorus andlow-sulfur coal charging material. We offer customers coke from our Moscow Coke and Gas Plant and Mechel Coke.
Chemical products. Chemical products are hydrocarbon products obtained as aby-product of the production of coke.coke production. We produce chemical products in our subsidiaries Moscow Coke and Gas Plant and Mechel Coke. We offer our customers coal tar, coal benzene and other compounds. Worldwide, coal tar is used in diverse applications, including in the production of electrode pitch, pitch coke,coal-tar oils, naphthalene, as well as boiler fuel. Coal benzene is used by the chemical industry to produce chemical compounds used as raw materials in organic synthesis in the production of synthetic fibres,fibers, as well as in the paint and varnish industry.
Iron ore concentrate. From our Korshunov Mining Plant, we offer iron ore concentrate with a standard iron content of 62%. Additionally, Yakutugol holds a subsoil licenseslicense for threethe Sutamskaya iron ore depositsarea located in Yakutia. These deposits containThis deposit contains high-quality iron ore, which will allow to produceproduction of iron ore concentrate with 65% iron content.
Mining process
Coal. At our Russian mines, coal is mined using open pit or underground mining methods. Following a drilling and blasting stage, a combination of shovels and draglines is used for moving coal and waste at our open pit mines. Production at the underground mines is predominantly from longwall mining, a form of underground coal mining where a long wall of coal in a seam is mined in a single slice. After mining, depending upon the amount of impurities in the coal, the coal is processed in a washing plant, where it is crushed and impurities are removed by gravity methods. Coking coal concentrate is then transported to coking plants for conversion to coke for use in pig iron smelting at steel plants. Steam coal is then shipped to power utilities, which use it in furnaces for steam generation to produce electricity. Among theThe advantages of our mining business areinclude the high quality of our coking coal and the low level of volatile matter in our steam coal.
Iron ore. At our Korshunov Mining Plant, ore is mined using the open pit mining method. Following a drilling and blasting stage, ore is hauled by dump trucks and dumping cars to the concentrating plant. At the concentrating plant, the ore is crushed and ground to a fine particle size, then separated into an iron ore concentrate slurry and a waste stream using wet magnetic separators. The iron ore is upgraded to a concentrate that contains aboutapproximately 62% elemental iron. Tailings are pumped to a tailings dam facility located adjacent to the concentrating plant. The concentrate is sent to disk vacuum filters which remove the water from the concentrate to reduce the moisture level, enabling shipment to customers by rail during warmer months;months, while, in colder periods, the concentrate must be dried further to prevent freezing in railcars. The Korshunov Mining Plant operates its own drying facility with a dry concentrate production capacity of up to 16,000 tonnes per day. In 2011-2012, Yakutugol obtained subsoil licenses for the Pionerskoye iron ore deposit, the Sutamskaya iron ore area and the Sivaglinskoye iron ore deposit in Yakutia.
Coal production
Our coal production consists of the following mines in Russia:
Subsidiary (Location) | Surface | Underground | ||
Yakutugol (Sakha Republic, Russia) | Neryungrinsky Open Pit | |||
| Kangalassky Open Pit | ||||
| Dzhebariki-Khaya Open Pit | ||||
Elgaugol (Sakha Republic, Russia) | Elga Open Pit | |||
Southern Kuzbass Coal Company (Kuzbass, Russia) | Sibirginsky Open Pit Tomusinsky Open Pit Olzherassky Open Pit Krasnogorsky Open Pit | V.I. Lenina Underground Sibirginskaya Underground Olzherasskaya- Novaya Underground |
Our coal mines are primarily located in the Kuznetsky basin, a major Russian coal-producing region, and in the Sakha Republic in Eastern Siberia.
The table below summarizes ourrun-of-mine (ROM)(“ROM”) coal production by type of coal and location of mines for the periods indicated.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
| Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | |||||||||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Yakutugol | 7.3 | 8.9 | 7.8 | 4.8 | 6.4 | 7.3 | ||||||||||||||||||||||||||||||||||||||||||
Elgaugol | 3.5 | 2.8 | 2.6 | 2.8 | 3.4 | 3.5 | ||||||||||||||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 1.9 | 2.5 | 3.4 | 4.3 | 2.5 | 1.9 | ||||||||||||||||||||||||||||||||||||||||||
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Total Coking Coal | 12.7 | 61.6 | % | 14.2 | 62.7 | % | 13.8 | 59.5 | % | 11.9 | 63.0 | % | 12.3 | 65.4 | % | 12.7 | 61.6 | % | ||||||||||||||||||||||||||||||
Steam Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Yakutugol | 1.0 | 1.0 | 1.4 | 1.0 | 0.6 | 1.0 | ||||||||||||||||||||||||||||||||||||||||||
Elgaugol | 0.7 | 0.9 | 1.3 | 1.5 | 1.5 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 4.0 | 4.2 | 4.2 | 3.3 | 2.9 | 4.0 | ||||||||||||||||||||||||||||||||||||||||||
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Total Steam Coal | 5.7 | 27.7 | % | 6.1 | 26.8 | % | 6.9 | 29.7 | % | 5.8 | 30.7 | % | 5.0 | 26.6 | % | 5.7 | 27.7 | % | ||||||||||||||||||||||||||||||
Anthracite | ||||||||||||||||||||||||||||||||||||||||||||||||
Yakutugol | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Elgaugol | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 2.2 | 2.4 | 2.5 | 1.2 | 1.5 | 2.2 | ||||||||||||||||||||||||||||||||||||||||||
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Total Anthracite | 2.2 | 10.7 | % | 2.4 | 10.5 | % | 2.5 | 10.8 | % | 1.2 | 6.3 | % | 1.5 | 8.0 | % | 2.2 | 10.7 | % | ||||||||||||||||||||||||||||||
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Total Coal | 20.6 | 100 | % | 22.7 | 100 | % | 23.2 | 100 | % | 18.9 | 100 | % | 18.8 | 100 | % | 20.6 | 100 | % | ||||||||||||||||||||||||||||||
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| (1) | Volumes are reported on a wet basis. |
The coking coal produced by our Russian mines is predominatelylow-sulfur (0.3%) bituminous coal. Heating values for coking coal range from 6,861 to 8,488 kcal/kg on a moisture- andash-free basis. Heating values for steam coal range from 6,627 to 8,286 kcal/kg on a moisture- andash-free basis.
The table below summarizes our saleable coal production by type of coal and location of mines for the periods indicated.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
| Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | Tonnes | % of Production | |||||||||||||||||||||||||||||||||||||
| (In millions of tonnes) | (In millions of tonnes) | |||||||||||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Yakutugol | 4.6 | 28 | % | 5.9 | 30 | % | 5.1 | 25 | % | 2.7 | 18 | % | 3.7 | 25 | % | 4.6 | 28 | % | ||||||||||||||||||||||||||||||
Elgaugol | 1.6 | 10 | % | 1.6 | 8 | % | 1.6 | 8 | % | 1.4 | 9 | % | 1.7 | 12 | % | 1.6 | 10 | % | ||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 1.8 | 11 | % | 3.1 | 16 | % | 2.7 | 13 | % | 3.1 | 20 | % | 1.9 | 13 | % | 1.8 | 11 | % | ||||||||||||||||||||||||||||||
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Total Coking Coal | 8.0 | 49 | % | 10.6 | 54 | % | 9.4 | 46 | % | 7.2 | 47 | % | 7.3 | 50 | % | 8.0 | 49 | % | ||||||||||||||||||||||||||||||
PCI | ||||||||||||||||||||||||||||||||||||||||||||||||
Yakutugol | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Elgaugol | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 1.3 | 8 | % | 1.4 | 7 | % | 2.0 | 9 | % | 1.5 | 10 | % | 1.2 | 8 | % | 1.3 | 8 | % | ||||||||||||||||||||||||||||||
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Total PCI | 1.3 | 8 | % | 1.4 | 7 | % | 2.0 | 9 | % | 1.5 | 10 | % | 1.2 | 8 | % | 1.3 | 8 | % | ||||||||||||||||||||||||||||||
Anthracite | ||||||||||||||||||||||||||||||||||||||||||||||||
Yakutugol | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Elgaugol | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 1.5 | 9 | % | 1.8 | 9 | % | 2.1 | 10 | % | 1.0 | 7 | % | 1.1 | 8 | % | 1.5 | 9 | % | ||||||||||||||||||||||||||||||
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Total Anthracite | 1.5 | 9 | % | 1.8 | 9 | % | 2.1 | 10 | % | 1.0 | 7 | % | 1.1 | 8 | % | 1.5 | 9 | % | ||||||||||||||||||||||||||||||
Steam Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Yakutugol | 2.7 | 17 | % | 3.2 | 17 | % | 3.5 | 17 | % | 2.4 | 16 | % | 2.4 | 16 | % | 2.7 | 17 | % | ||||||||||||||||||||||||||||||
Elgaugol | 1.2 | 7 | % | 1.3 | 7 | % | 1.6 | 8 | % | 1.9 | 13 | % | 1.5 | 10 | % | 1.2 | 7 | % | ||||||||||||||||||||||||||||||
Southern Kuzbass Coal Company | 1.7 | 10 | % | 1.2 | 6 | % | 2.0 | 10 | % | 1.1 | 7 | % | 1.2 | 8 | % | 1.7 | 10 | % | ||||||||||||||||||||||||||||||
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Total Steam Coal | 5.6 | 34 | % | 5.7 | 30 | % | 7.1 | 35 | % | 5.4 | 36 | % | 5.1 | 34 | % | 5.6 | 34 | % | ||||||||||||||||||||||||||||||
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Total Coal | 16.4 | 100 | % | 19.5 | 100 | % | 20.6 | 100 | % | 15.1 | 100 | % | 14.7 | 100 | % | 16.4 | 100 | % | ||||||||||||||||||||||||||||||
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Yakutugol mines
Our Yakutugol coal mines are located in the Sakha Republic. The Sakha Republic is located in Eastern Siberia and covers an area of 3.1 million square kilometers. It has a population of fewer than one million inhabitants. Its capital, Yakutsk, is located on the Lena River in south central Yakutia.
Our Yakutugol mines include three open pit mines: Neryungrinsky Open Pit, Kangalassky Open Pit and Dzhebariki-Khaya Open Pit. Neryungrinsky Open Pit is located in the South-Yakutsky basin which covers an area of 25,000 square kilometers and lies near the southern border of Yakutia. Neryungrinsky Open Pit is located near the town of Neryungri, one of the main industrial centers of Yakutia and its second largest city. Kangalassky Open Pit and Dzhebariki-Khaya Open Pit are located in the Lensky basin which covers an area of 750,000 square kilometers and lies near Yakutsk.
The table below sets forth certain information regarding the subsoil licenses for our Yakutugol coal mines.
Mine | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||||||||||||||||||||||||||||
Neryungrinsky Open Pit |  12336 (Moshchny seam) | 15.3 | Open pit | 2029 | Dec 2024 | In production | 1979 | Ownership |  12336  (Moshchny seam) | 15.3 | Open pit | 2029 | Dec 2024 | In production | 1979 | Ownership | ||||||||||||||||||||||||||||||||||||||||
Kangalassky Open Pit | 15017 (Kangalassk) | 7.7 | Open pit | 2100 | Dec 2027 | In production | 1962 | Ownership | 15017 (Kangalassk) | 7.7 | Open pit | 2100 | Dec 2027 | In production | 1962 | Ownership | ||||||||||||||||||||||||||||||||||||||||
Dzhebariki-Khaya Open Pit | 15061 (Dzhebariki-Khaya) | 1.1 | Open pit | 2036 | Dec 2023 | In production | 2017 | Ownership | 15061 (Dzhebariki- | 1.1 | Open pit | 2024 | Dec 2023 | In production | 2017 | Ownership | ||||||||||||||||||||||||||||||||||||||||
| (1) | “In production” refers to sites that are currently producing coal. |
The earliest production at our Yakutugol mines was in 1962, although we acquired these mines and license areas in October 2007. Neryungrinsky Open Pit produceslow-volatile hard coking coal and steam coal which are sold primarily in the Asia-Pacific region and domestically. Neryungrinsky Open Pit has a railway spur connected to the Russian rail system, which is controlled by Russian Railways. Kangalassky Open Pit produces steam coal that is generally sold as fuel for boiler plants in Yakutia. It is accessible through anall-weather road from Kangalassy and through a highway from Yakutsk. Dzhebariki-Khaya Open Pit produces steam coal, most of which is sold to state housing and municipal services. Dzhebariki-Khaya Open Pit is accessible only by means of the Aldan River.
The table below summarizes ROM coal production of our Yakutugol mines by mine and type of coal for the periods indicated.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Mine | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | ||||||||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Neryungrinsky Open Pit | 7.3 | 8.9 | 7.8 | 4.8 | 6.4 | 7.3 | ||||||||||||||||||||||||||||||||||||||||||
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Total Coking Coal | 7.3 | 88.0 | % | 8.9 | 89.9 | % | 7.8 | 84.9 | % | 4.8 | 82.8 | % | 6.4 | 91.4 | % | 7.3 | 88.0 | % | ||||||||||||||||||||||||||||||
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Steam Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Neryungrinsky Open Pit | 0.7 | 0.4 | 0.7 | 0.5 | 0.0 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||
Dzhebariki-Khaya Open Pit | 0.2 | 0.4 | 0.5 | 0.3 | 0.4 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||
Kangalassky Open Pit | 0.1 | 0.2 | 0.2 | 0.2 | 0.2 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||
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Total Steam Coal | 1.0 | 12.0 | % | 1.0 | 10.1 | % | 1.4 | 15.1 | % | 1.0 | 17.2 | % | 0.6 | 8.6 | % | 1.0 | 12.0 | % | ||||||||||||||||||||||||||||||
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Total Coal | 8.3 | 100 | % | 9.9 | 100 | % | 9.2 | 100 | % | 5.8 | 100 | % | 7.0 | 100 | % | 8.3 | 100 | % | ||||||||||||||||||||||||||||||
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| (1) | Volumes are reported on a wet basis. |
The table below sets forth coal sales volumes of our Yakutugol mines by type of coal and destinations for the periods indicated.
Coal Type | Region | 2017 | 2016 | 2015 | Region | 2019 | 2018 | 2017 | ||||||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||||||
Coking coal | Asia | 3,307.1 | 3,942.6 | 3,609.7 | Asia | 2,418.5 | 2,694.6 | 3,307.1 | ||||||||||||||||||||||||
| Russia | 786.2 | 1,136.1 | 894.5 | Russia | 0.0 | 509.8 | 786.2 | |||||||||||||||||||||||||
| CIS | 13.2 | 22.3 | 9.8 | CIS | 1.0 | 4.1 | 13.2 | |||||||||||||||||||||||||
| Europe | 2.2 | 19.1 | 0.5 | Europe | 0.0 | 0.0 | 2.2 | |||||||||||||||||||||||||
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Total | 4,108.7 | 5,120.1 | 4,514.5 | 2,419.5 | 3,208.5 | 4,108.7 | ||||||||||||||||||||||||||
Steam coal | Russia | 930.5 | 703.2 | 776.8 | Russia | 563.7 | 614.2 | 930.5 | ||||||||||||||||||||||||
| Asia | 498.1 | 622.5 | 124.7 | Asia | 108.8 | 51.4 | 498.1 | |||||||||||||||||||||||||
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Total | 1,428.6 | 1,325.7 | 901.5 | 672.5 | 665.6 | 1,428.6 | ||||||||||||||||||||||||||
Middlings | Russia | 1,087.9 | 1,758.9 | 1,647.9 | Russia | 218.8 | 1,512.3 | 1,087.9 | ||||||||||||||||||||||||
| Asia | 732.1 | 459.4 | 476.1 | Asia | 1,173.8 | 394.6 | 732.1 | |||||||||||||||||||||||||
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Total | 1,820.0 | 2,218.3 | 2,124.0 | 1,392.6 | 1,906.9 | 1,820.0 | ||||||||||||||||||||||||||
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Total | 7,357.3 | 8,664.1 | 7,540.0 | 4,484.6 | 5,781.0 | 7,357.3 | ||||||||||||||||||||||||||
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Elgaugol mine
Our Elga Open Pit is located in the South-Yakutsky basin of the Toko Coal-Bearing region in the Sakha Republic. This coal region was first discovered and explored in 1952 with the first geological surveys being conducted infrom 1954 through 1956. The closest inhabited localities are Verkhnezeysk village located(located 320 kilometers south of the deposit,deposit) and the town of Neryungri located(located 415 kilometers to the west.west). Since 1998, there have been several studies on the Elga coal deposit, including geology and resources, mine planning and feasibility studies. Overburden removal at the Elga deposit commenced in November 2010. Coal mining at Elga Open Pit commenced in August 2011.
Our subsidiary Elgaugol was established on August 14, 2013 under the laws of the Russian Federation for the purpose of raising project financing from Vnesheconombank. Elgaugol holds the subsoil license for the Elga coal deposit.
The table below sets forth certain information regarding the subsoil license for our Elgaugol mine.
Mine | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||||||||||||
Elga Open Pit | 03730 | (Elga) | 144.1 | Open pit | 2100 | Dec 2033 | In production | 2011 | Lease | |||||||||||||||||||||||
| (1) | “In production” refers to sites that are currently producing coal. |
Elga Open Pit produces two types of coal: high-quality hard coking coal (high-volatile) and steam coal. It also produces middlings (a(by-product of the coking coal washing process). Coking coal and steam coal are sold primarily in the Asia-Pacific market with transshipment in ports of the Russian Far East.
The table below summarizes ROM coal production of our Elgaugol mine by type of coal for the periods indicated.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Mine | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | ||||||||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Elga Open Pit | 3.5 | 2.8 | 2.6 | 2.8 | 3.4 | 3.5 | ||||||||||||||||||||||||||||||||||||||||||
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Total Coking Coal | 3.5 | 83.3 | % | 2.8 | 75.7 | % | 2.6 | 66.7 | % | 2.8 | 65.1 | % | 3.4 | 69.4 | % | 3.5 | 83.3 | % | ||||||||||||||||||||||||||||||
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Steam Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Elga Open Pit | 0.7 | 0.9 | 1.3 | 1.5 | 1.5 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||
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Total Steam Coal | 0.7 | 16.7 | % | 0.9 | 24.3 | % | 1.3 | 33.3 | % | 1.5 | 34.9 | % | 1.5 | 30.6 | % | 0.7 | 16.7 | % | ||||||||||||||||||||||||||||||
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Total Coal | 4.2 | 100 | % | 3.7 | 100 | % | 3.9 | 100 | % | 4.3 | 100 | % | 4.9 | 100 | % | 4.2 | 100 | % | ||||||||||||||||||||||||||||||
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| (1) | Volumes are reported on a wet basis. |
The table below sets forth coal sales volumes of our Elgaugol mine by type of coal and destinations for the periods indicated.
Coal Type | Region | 2017 | 2016 | 2015 | Region | 2019 | 2018 | 2017 | ||||||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||||||
Coking coal | Asia | 426.3 | 242.6 | 11.8 | Asia | 315.1 | 441.6 | 426.3 | ||||||||||||||||||||||||
Total | 315.1 | 441.6 | 426.3 | |||||||||||||||||||||||||||||
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Total | 426.3 | 242.6 | 11.8 | |||||||||||||||||||||||||||||
Steam coal | Asia | 1,088.8 | 1,429.2 | 1,201.5 | Asia | 1,718.4 | 1,296.6 | 1,088.8 | ||||||||||||||||||||||||
| Russia | 1.0 | 1.2 | 209.0 | Russia | 156.2 | 26.3 | 1.0 | |||||||||||||||||||||||||
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Total | 1,089.8 | 1,430.4 | 1,410.5 | |||||||||||||||||||||||||||||
Middlings | Asia | 0.0 | 0.0 | 152.8 | ||||||||||||||||||||||||||||
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Total | 0.0 | 0.0 | 152.8 | 1,874.6 | 1,322.9 | 1,089.8 | ||||||||||||||||||||||||||
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Total | 1,516.1 | 1,673.0 | 1,575.1 | 2,189.7 | 1,764.5 | 1,516.1 | ||||||||||||||||||||||||||
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In 2009, the general scheme of the Elga coal complex development and the plan for initial mine block development were prepared. The plan for initial mine block development was subsequently approved by governmental authorities. In 2011, the project documentation of the first stage of the Elga coal complex construction was prepared and subsequently approved by governmental authorities.
In December 2011, we finished laying track for the rail line to the Elga deposit. TheThis 321 kilometer-long rail line is now in operation, and we are able to use it for transportation of coal produced at Elga Open Pit. The rail line connects Elga Open Pit with the Baikal-Amur Mainline (at the Ulak railway station), which, in turn, provides access to the Russian rail network in general,generally and access to Pacific Ocean ports, in particular. We will further develop the rail line to increase its capacity in line with our production plans. In March 2016, we contributed the Ulak-Elga rail line to the registered capital of the newly established company Elga-road OOO.Elga-road.
In October 2012, we launched a pilot seasonal washing plant for Elga Open Pit with a seasonal capacity of 2.0 million tonnes per annum. In late 2014, we completed the transfer of the pilot seasonal washing plant to year-round operation with a designedan annual capacity of up to 2.7 million tonnes per annum.
Currently,In 2019, the facilities of the Elga has an electricity substation with diesel power generators with a total installed capacitycoal complex were connected to high-voltage transmission lines of 9 megawatts (“MW”). Federal Grid Company, the state-owned operator of the unified national electric grid, is installing high-voltage transmission lineswhich allowed us to deliver electricity from the Zeysky hydro power plant located 270 kilometers from the site, and we are constructing electricity-receiving infrastructure capable of receiving of up to 134 MW. We expect to start receiving electricity from this power plant in the second quarter of 2018.reduce energy-related costs.
In accordance with the order of the Federal Agency for Subsoil Use (“Rosnedra”) No. 177 dated February 27, 2015 “On the conducting of aone-time updating of subsoil licenses,” we filed an application with the Department for Subsoil Use for the Sakha
Republic (Yakutia) regarding conduct of an update procedure relating to the terms of the subsoil license for the Elga coal deposit. In December 2015, the Department for Subsoil Use for the Sakha Republic (Yakutia) made a decision to update the existing terms and issued an amendment to the subsoil license. The amendments provideThis amendment provided that the level of coal extraction and deadlines offor reaching the design capacity arewould be determined by the deposit development technical plan. In September 2016, based on the decision of Rosnedra, the subsoil license for the Elga coal deposit was extended until December 31, 2033.
In the event of significant deviations from the design solutions, we can prepare and duly approve the adjustment of the current technical plan in order to avoid violation of the terms of subsoil use. Thus, the amended license terms allow us to manage licensing risks by adjusting the project documentation which significantly reduces the risk of suspension of the subsoil license in the event of a deviation from the design solutions. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — The development of the Elga coal deposit is subject to certain risks due to the substantial amount of capital costs involved in developing the required infrastructure.”
We are currently negotiating a potential sale of the Elga coal complex, for further details see “Item 4. Information on the Company — Business Strategy.”
Southern Kuzbass mines
The Kuznetsky basin, or Kuzbass, is located in the southeastern part of Western Siberia and is one of the largest coal mining areas in the world, covering an area of around 70,000 square kilometers. Coal-bearing seams extend over an area of 26,700 square kilometers and reach a depth of up to 1,800 meters. Coal was discovered in 1721, and systematic mining started in 1851. During the Soviet era, Kuzbass was the second largest regional coal producer. According to the Central Dispatching Department, Kuzbass (Kemerovo region) now accounts for 59%57% of Russia’s total coal production.
All of our Southern Kuzbass mines are located in southeast Kuzbass around the town of Mezhdurechensk in the Kemerovo region, with the exception of the Yerunakovskaya mine area, which is located about 100 kilometers northwest of Mezhdurechensk.
The earliest production at our Southern Kuzbass mines was in 1953, although we acquired these mines and license areas starting in the 1990s. The Southern Kuzbass mines include four open pit mines and three underground mines: Sibirginsky Open Pit, Tomusinsky Open Pit, Olzherassky Open Pit, Krasnogorsky Open Pit, V.I. Lenina Underground, Sibirginskaya Underground and Olzherasskaya-Novaya Underground.
Our Southern Kuzbass mines and the related washing plants produce semi-soft and semi-hard coking coal, anthracite, PCI and steam coal. Our Kuzbass operations are connected by rail to the Trans-Siberian Mainline and substantially all products are shipped by rail. Products are generally shipped by rail to Russian customers, to northwestern Russian and Baltic ports for European customers, to Port Posiet and Port Vanino for export to Asia and to Port Temryuk for customers in the Black Sea and Mediterranean basins.
The table below sets forth certain information regarding the subsoil licenses for our coal mines in Kuzbass, all of which are held by our subsidiary Southern Kuzbass Coal Company, unless otherwise noted.
Mine | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||||
Krasnogorsky Open Pit |  14016  (Tomsk, Sibirginsk) | 22.4 | Open pit | 2055 | Jan 2021 | In production | 1954 | Lease | ||||||||||||||||
| 13367 (Sorokinsk, Tomsk, Sibirginsk) | 2.8 | Nov 2025 | In production | 2012 | Lease | |||||||||||||||||||
Olzherassky Open Pit | 01374 (Raspadsk, Berezovsk, Sosnovsk) | 10.1 | Open pit | 2050 | Dec 2029 | In production | 1980 | Lease | ||||||||||||||||
| 12939 (Raspadsk)(2) | 3.5 | Dec 2024 | Development | n/a | Lease | |||||||||||||||||||
| 12940(Berezovsk-2, Berezovsk, Olzherassk) | 4.8 | Dec 2024 | In production | 2007 | Lease | |||||||||||||||||||
| 01917 (Berezovsk Gluboky) | 7.4 | Aug 2035 | Exploration and development | n/a | Lease | |||||||||||||||||||
Tomusinsky Open Pit | 13312 (Tomsk)(3) | 6.7 | Open pit | 2028 | Dec 2020 | In production | 1959 | Lease | ||||||||||||||||
Sibirginsky Open Pit | 13639 (Sibirginsk, Kureinsk, Uregolsk) | 16.4 | Open pit | 2055 | Dec 2032 | In production | 1970 | Lease | ||||||||||||||||
Uregolsk) | 2.4 | Apr 2031 | In production | 2011 | Lease | |||||||||||||||||||
Sibirginskaya |
|
| 5.9 |
| Underground |
| 2058 |
| Dec 2024 | In production |
| 2002 |
|
| Lease |
| ||||||||
(Sibirginsk-2, Sibirginsk, Kureinsk) | 0.9 | Dec 2032 | In production | 2014 | Lease | |||||||||||||||||||
| 01914(Sibirginsk-3) | 7.6 | Aug 2035 | Exploration and development | n/a | Lease | |||||||||||||||||||
V.I. Lenina Underground |
|
| 10.0 |
| Underground |
| 2050 |
| Dec 2032 | In production |
| 1953 |
|
| Lease |
| ||||||||
| 01701 (Granichny, Olzherassk) | 1.2 | Feb 2033 | Exploration and development | n/a | | Lease, Ownership | | |||||||||||||||||
Olzherasskaya-Novaya Underground |
|
| 1.2 |
| Underground |
| 2035 |
| Dec 2021 | In production |
| 2008 |
|
| Lease |
| ||||||||
(Olzherassk-2, Raspadsk) | 0.2 | Jan 2030 | In production | 2010 | Lease | |||||||||||||||||||
(Razvedochny, Raspadsk) | 14.6 | Nov 2025 | In production | 2010 | Lease | |||||||||||||||||||
Yerunakovskaya-1 Underground (project) |
(Yerunakovsk-1, Yerunakovsk)(4) |
| 8.4 |
| Underground |
| 2033 |
| Jun 2025 | Development |
| n/a |
|
| Lease |
| ||||||||
Yerunakovskaya-3 Underground (prospect) |
(Yerunakovsk-3, Yerunakovsk)(4) |
| 7.1 |
| Underground |
| 2115 |
| Jun 2025 | Development |
| n/a |
|
| — |
| ||||||||
Olzherasskaya-Glubokaya Underground (prospect) |
|
| 19.2 |
| Underground |
| 2211 |
| Nov 2025 | Development |
| n/a |
|
| — |
| ||||||||
Usinskaya Underground (prospect) |
|
| 3.6 |
| Underground |
| 2071 |
| Dec 2033 | Conservation |
| n/a |
|
| Ownership |
| ||||||||
Mine | License (plot) | Area (sq. km) | Mining Method | Life of Mine | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||
Krasnogorsky Open Pit |  14016  (Tomsk, Sibirginsk) | 22.4 | Open pit | 2055 | Jan 2021 | In production | 1954 | Lease | ||||||||||||||
| 13367 (Sorokinsk, Tomsk, Sibirginsk) | 2.8 | Nov 2025 | In production | 2012 | Lease | |||||||||||||||||
Olzherassky Open Pit | 01374 (Raspadsk, Berezovsk, Sosnovsk) | 10.1 | Open pit | 2050 | Dec 2029 | In production | 1980 | Lease | ||||||||||||||
| 12939 (Raspadsk)(2) | 3.5 | Dec 2024 | Development | n/a | Lease | |||||||||||||||||
| 12940 (Berezovsk-2, Berezovsk, Olzherassk) | 4.8 | Dec 2024 | In production | 2007 | Lease | |||||||||||||||||
| 01917 (Berezovsk Gluboky) | 7.4 | Aug 2035 | Development | n/a | Lease | |||||||||||||||||
Tomusinsky Open Pit | 13312 (Tomsk)(3) | 6.7 | Open pit | 2028 | Dec 2025 | In production | 1959 | Lease | ||||||||||||||
Sibirginsky Open Pit | 13639 (Sibirginsk, Kureinsk, Uregolsk) | 16.4 | Open pit | 2055 | Dec 2032 | In production | 1970 | Lease | ||||||||||||||
Uregolsk) | 2.4 | Apr 2031 | In production | 2011 | Lease | |||||||||||||||||
Sibirginskaya Underground |
| 5.9 | Underground | 2058 | Dec 2024 | In production | 2002 | Lease | ||||||||||||||
(Sibirginsk-2, Sibirginsk, Kureinsk) | 0.9 | Dec 2032 | In production | 2014 | Lease | |||||||||||||||||
| 01914 (Sibirginsk-3) | 7.6 | Aug 2035 | Development | n/a | Lease | |||||||||||||||||
V.I. Lenina Underground |
| 10.0 | Underground | 2050 | Dec 2032 | In production | 1953 | Lease | ||||||||||||||
| 01701 (Granichny, Olzherassk) | 1.2 | Feb 2033 | Development | n/a | Lease, Ownership | |||||||||||||||||
Olzherasskaya-Novaya Underground | 14199 (Raspadsk) | 1.2 | Underground | 2035 | Apr 2026 | In production | 2008 | Lease | ||||||||||||||
(Olzherassk-2, Raspadsk) | 0.2 | Jan 2030 | In production | 2010 | Lease | |||||||||||||||||
(Razvedochny, Raspadsk) | 14.6 | Nov 2025 | In production | 2010 | Lease | |||||||||||||||||
Yerunakovskaya-1 Underground (project) |
| 8.4 | Underground | 2033 | Jun 2025 | Development | n/a | Lease | ||||||||||||||
Yerunakovskaya-3 Underground (prospect) |
| 7.1 | Underground | 2115 | Jun 2025 | Development | n/a | — | ||||||||||||||
Olzherasskaya-Glubokaya Underground (prospect) |
| 19.2 | Underground | 2211 | Nov 2025 | Development | n/a | — | ||||||||||||||
Usinskaya Underground (prospect) |
| 3.6 | Underground | 2071 | Dec 2033 | Conservation | n/a | Ownership | ||||||||||||||
| (1) | “In production” refers to sites that are currently producing coal. “Development” refers to sites where preliminary work is being carried out. |
| (2) | We failed to commence commercial production in 2009 as required by the subsoil license due to unfavorable mine economics. |
| (3) | License held by Tomusinsky Open Pit, a subsidiary of Southern Kuzbass Coal Company. |
| (4) | We failed to commence commercial production in 2011 as required by the subsoil license due to unfavorable mine economics. |
| (5) | We failed to commence commercial production in 2012 as required by the subsoil license due to unfavorable mine economics. |
The table below summarizes ROM coal production of our Southern Kuzbass mines by mine and type of coal for the periods indicated.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Mine | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | Tonnes | % of Total Production | ||||||||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
Coking Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Sibirginsky Open Pit | 0.2 | 0.2 | 0.5 | 1.7 | 0.3 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||
Tomusinsky Open Pit | 0.4 | 0.8 | 0.8 | 0.5 | 0.4 | 0.4 | ||||||||||||||||||||||||||||||||||||||||||
V.I. Lenina Underground | 0.5 | 0.8 | 0.4 | 0.4 | 0.6 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||
Sibirginskaya Underground | 0.4 | 0.2 | 1.1 | 0.4 | 0.5 | 0.4 | ||||||||||||||||||||||||||||||||||||||||||
Olzherassky Open Pit | 0.4 | 0.5 | 0.6 | 1.3 | 0.7 | 0.4 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total Coking Coal | 1.9 | 23.5 | % | 2.5 | 27.5 | % | 3.4 | 33.7 | % | 4.3 | 49.4 | % | 2.5 | 36.2 | % | 1.9 | 23.5 | % | ||||||||||||||||||||||||||||||
|
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|
|
|
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| |||||||||||||||||||||||||||||||||||||
Steam Coal | ||||||||||||||||||||||||||||||||||||||||||||||||
Krasnogorsky Open Pit | 1.7 | 1.8 | 2.7 | 1.8 | 1.6 | 1.7 | ||||||||||||||||||||||||||||||||||||||||||
Sibirginsky Open Pit | 0.3 | 0.3 | 0.5 | 0.5 | 0.1 | 0.3 | ||||||||||||||||||||||||||||||||||||||||||
Olzherassky Open Pit | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||||||||||||||||||||||||||||||||||||||||||
Olzherasskaya-Novaya Underground | 1.5 | 1.5 | 0.3 | 0.7 | 0.8 | 1.5 | ||||||||||||||||||||||||||||||||||||||||||
Tomusinsky Open Pit | 0.5 | 0.6 | 0.7 | 0.3 | 0.4 | 0.5 | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total Steam Coal | 4.0 | 49.4 | % | 4.2 | 46.1 | % | 4.2 | 41.6 | % | 3.3 | 36.8 | % | 2.9 | 42.0 | % | 4.0 | 49.4 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Anthracite | ||||||||||||||||||||||||||||||||||||||||||||||||
Krasnogorsky Open Pit | 2.2 | 2.4 | 2.5 | 1.2 | 1.5 | 2.2 | ||||||||||||||||||||||||||||||||||||||||||
Sibirginsky Open Pit | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Olzherassky Open Pit | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Olzherasskaya-Novaya Underground | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Tomusinsky Open Pit | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||
Total Anthracite | 2.2 | 27.1 | % | 2.4 | 26.4 | % | 2.5 | 24.7 | % | 1.2 | 13.8 | % | 1.5 | 21.8 | % | 2.2 | 27.1 | % | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||
Total Coal | 8.1 | 100 | % | 9.1 | 100 | % | 10.1 | 100 | % | 8.8 | 100 | % | 6.9 | 100 | % | 8.1 | 100 | % | ||||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||||||||||
| (1) | Volumes are reported on a wet basis. |
The table below sets forth Southern Kuzbass mines’ coal sales volumes by type of coal and destinations for the periods indicated.
Coal Type | Region | 2017 | 2016 | 2015 | Region | 2019 | 2018 | 2017 | ||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||
Coking coal | Russia | 0.0 | 242.0 | 492.2 | Asia | 554.8 | 461.4 | 261.7 | ||||||||||||||||||||
| Asia | 261.7 | 179.3 | 227.4 | Russia | 1,013.6 | 146.4 | 0.0 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
Total | 261.7 | 421.3 | 719.6 | 1,568.4 | 607.8 | 261.7 | ||||||||||||||||||||||
Anthracite | Europe | 971.4 | 892.6 | 1,241.2 | Europe | 361.3 | 729.3 | 971.4 | ||||||||||||||||||||
| Other | 61.2 | 255.9 | 73.4 | Asia | 171.8 | 177.9 | 256.3 | |||||||||||||||||||||
| Asia | 256.3 | 224.9 | 321.7 | Russia | 8.1 | 46.4 | 52.1 | |||||||||||||||||||||
| CIS | 54.6 | 108.6 | 68.2 | CIS | 0.0 | 11.1 | 54.6 | |||||||||||||||||||||
| Russia | 52.1 | 32.6 | 42.3 | Middle East(1) | 6.4 | 0.0 | 0.0 | |||||||||||||||||||||
| Middle East(1) | 0.0 | 0.0 | 14.9 | Other | 0.0 | 0.0 | 61.2 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
Total | 1,395.6 | 1,514.6 | 1,761.7 | 547.6 | 964.7 | 1,395.6 | ||||||||||||||||||||||
PCI | Asia | 1,433.6 | 1,571.9 | 1,684.3 | Asia | 1,287.7 | 1,217.3 | 1,433.6 | ||||||||||||||||||||
| Europe | 0.0 | 37.8 | 473.5 | Middle East(1) | 129.3 | 20.2 | 31.2 | |||||||||||||||||||||
| Middle East(1) | 31.2 | 10.4 | 91.5 | Europe | 0.0 | 0.0 | 0.0 | |||||||||||||||||||||
| CIS | 0.0 | 0.0 | 0.0 |
|
|
| ||||||||||||||||||||||
| Russia | 0.0 | 0.0 | 4.7 | |||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||
Total | 1,464.8 | 1,620.1 | 2,254.0 | 1,417.0 | 1,237.5 | 1,464.8 | ||||||||||||||||||||||
Steam coal | Asia | 1,001.9 | 845.6 | 122.2 | Asia | 456.3 | 598.9 | 1,001.9 | ||||||||||||||||||||
| Middle East(1) | 8.9 | 44.9 | 96.7 | |||||||||||||||||||||||||
| Russia | 12.2 | 12.7 | 30.4 | Europe | 85.1 | 22.8 | 36.7 | |||||||||||||||||||||
| Europe | 36.7 | 4.6 | 11.6 | Russia | 3.0 | 13.3 | 12.2 | |||||||||||||||||||||
| CIS | 0.0 | 0.0 | 15.5 | Middle East(1) | 0.0 | 0.0 | 8.9 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
Total | 1,059.7 | 907.8 | 276.4 | 544.4 | 635.0 | 1,059.7 | ||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||
Total | 4,181.8 | 4,463.8 | 5,011.7 | 4,077.4 | 3,445.0 | 4,181.8 | ||||||||||||||||||||||
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| |||||||||||||||||||||||
| (1) | Includes Turkey only. |
Coal washing plants
We operate six coal washing plants and one processing unit in Russia: fourRussia. Four of these coal washing plants and one processing unit are located near our coal mines in Southern Kuzbass,Kuzbass. Additionally, one coal washing plant is located near Neryungrinsky Open Pit, and one coal washing plant is at Elga Open Pit.
Our four coal washing plants and one processing unit located near our coal mines in Southern Kuzbass have an aggregate annual capacity of approximately 17.3 million tonnes of ROM coal. These are Krasnogorskaya Washing Plant, Sibir Washing Plant, Tomusinskaya Washing Plant, Kuzbasskaya Washing Plant and Sibirginskaya Processing Unit. These washing plants have aggregate storage capacity for saleable products of 142,700 tonnes, of which 34% is covered storage.
Neryungrinskaya Washing Plant located near Neryungrinsky Open Pit has an annual capacity of 9.0 million tonnes. The plant produces coking coal concentrate and middlings.
In October 2012, we launched a pilot seasonal washing plant for Elga Open Pit, which operated in the warmer months of April to October only, with a seasonal capacity of 2.0 million tonnes per annum. In late 2014, we completed the transfer of the pilot seasonal washing plant to year-round operation with a designedan annual capacity of up to 2.7 million tonnes per annum.tonnes.
In 2017,2019, our washing plants enriched 18.416.0 million tonnes of our coal feedstock.
Coke and chemical products production
The following table lists the various types and grades of coke and chemical products we produce and sell. We also produce and sell coke gas.
Plant | Products | |
Moscow Coke and Gas Plant | Coke +60 mm, Coke +40 mm, Coke25-40 mm, Coke nut10-25 mm, Coke breeze0-10 mm, Coal benzene, Coal tar, Coke gas | |
Mechel Coke | Coke +40 mm, Coke +25 mm, Coke25-40 mm, Coke nut10-25 mm, Coke breeze0-10 mm, Coal benzene, Coal tar, Ammonium sulfate, Coke gas |
We have two coke plants, one of which is located in the city of Chelyabinsk and the other in the Moscow region. Coke is prepared by pyrolysis (heating in the absence of oxygen) oflow-ash,low-phosphorus andlow-sulfur coal. Coke is used in the blast furnace as a main source of heat, a reducing agent for iron and a raising agent for charging material in the smelting process.
In addition, we produce coke nut, which is smaller in size than metallurgical coke and is principally used as a reducing agent in ferroalloys production and for other purposes, and coke breeze, which is even smaller in size and is principally used for sintering iron ore concentrate prior to its use in blast furnaces or as fuel. Coke production and sales volumes figures presented herein include, among others, coke nut and coke breeze. Additional chemical products, such as coal benzene, coal tar and ammonium sulfate, are obtained asby-products in the coke production process.
The table below summarizes our production of coke, chemical products and coke gas for the periods indicated.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
(Coke and chemical products in thousands of tonnes) (Coke gas in millions of cubic meters) | (Coke and chemical products in thousands of tonnes) (Coke gas in millions of cubic meters) | |||||||||||||||||||||||
Mechel Coke | ||||||||||||||||||||||||
Coke (6% moisture) | 2,269 | 2,244 | 2,313 | 2,014 | 2,040 | 2,269 | ||||||||||||||||||
Chemical products | 121 | 110 | 112 | 116 | 109 | 121 | ||||||||||||||||||
Coke gas | 798 | 824 | 851 | 720 | 744 | 798 | ||||||||||||||||||
Moscow Coke and Gas Plant | ||||||||||||||||||||||||
Coke (6% moisture) | 561 | 742 | 723 | 601 | 542 | 561 | ||||||||||||||||||
Chemical products | 29 | 38 | 38 | 32 | 29 | 29 | ||||||||||||||||||
Coke gas | 237 | 328 | 319 | 261 | 235 | 237 | ||||||||||||||||||
Total | ||||||||||||||||||||||||
Coke (6% moisture) | 2,830 | 2,986 | 3,036 | 2,615 | 2,582 | 2,830 | ||||||||||||||||||
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| |||||||||||||||||||
Chemical products | 150 | 148 | 150 | 148 | 138 | 150 | ||||||||||||||||||
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| |||||||||||||||||||
Coke gas | 1,035 | 1,152 | 1,170 | 981 | 979 | 1,035 | ||||||||||||||||||
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| |||||||||||||||||||
The table below summarizes our sales volumes of coke and chemical products for the periods indicated.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||
Coke | 771 | 894 | 985 | 945 | 697 | 771 | ||||||||||||||||||
Chemical products | 140 | 146 | 155 | 136 | 131 | 140 | ||||||||||||||||||
The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Moscow Coke and Gas Plant’s principal production area.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | ||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||
Coke (6% moisture) | 646 | 86.8 | % | — | 673 | 89.3 | % | — | ||||||||||||||||
The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Mechel Coke’s principal production area.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | ||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||
Coke (6% moisture) | 2,844 | 79.8 | % | — | 3,026 | 66.6 | % | — | ||||||||||||||||
Our own production facilities purchase a substantial majority of our coke production. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, purchases of our coke by our own production facilities amounted to 1.91.6 million tonnes, 1.91.7 million tonnes and 1.9 million tonnes, respectively, which represented 71%63%, 68%71% and 66%71% of our total coke sales volumes (including intra-group sales) for those periods.
We purchase some coking coal from other producers in order to produce coke. TheOur need to purchase coking coal from third parties for coke production varies from period to period, depending on customer demand for particular products and the availability of suitable coal grades from our own mines.
Iron ore and concentrate production
Our iron ore operations consist of Korshunov Mining Plant, which operates Korshunovsky Open Pit, Rudnogorsky Open Pit and the Korshunovsky concentrating plant, andplant. In 2011-2012, Yakutugol obtained three subsoil licenses held by Yakutugol for the Pionerskoye iron ore deposit, the Sutamskaya iron ore area and the Sivaglinskoye iron ore deposit in Yakutia. In December 2019, Rosnedra early terminated the subsoil use right for the Pionerskoye and the SutamskayaSivaglinskoye iron ore area in Yakutia.deposits due to our failure to meet operational deadlines under the subsoil licenses.
The Korshunovsky concentrating plant is located outside of the town of Zheleznogorsk-Ilimsky, 120 kilometers east of Bratsk in the Irkutsk region. Korshunovsky Open Pit is located near the concentrating plant, and Rudnogorsky Open Pit is located about 85 kilometers to the northwest of the concentrating plant. We have operated these iron ore mines and the concentrating plant since 2003 when we acquired Korshunov Mining Plant. Both mines produce a magnetite ore (Fe3O4), and the concentrating plant produces iron ore concentrate with a standard iron content of 62%. Product is shipped by rail to our customers. All of the sites are served by regional public highways and a nearby federal motorway. The area is served by the Baikal-Amur Mainline, which connects the Trans-Siberian Mainline with China and Yakutia.
The table below sets forth certain information regarding the subsoil licenses for our iron ore mines, all of which are held by our subsidiary Korshunov Mining Plant.
Mine | License (plot) | Area (sq. km) | Mining Method | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | License (plot) | Area (sq. km) | Mining Method | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||||||||||||||||||||
Korshunovsky Open Pit | |  03333  (Korshunovsk | ) | 4.3 | Open pit | Dec 2026 | In production | 1965 | Lease |  03333  (Korshunovsk) | 4.3 | Open pit | Dec 2026 | In production | 1965 | Lease | ||||||||||||||||||||||||||||||
Rudnogorsky Open Pit | | 03334 (Rudnogorsk | ) | 5.3 | Open pit | Jan 2028 | In production | 1984 | Ownership | 03334 (Rudnogorsk) | 5.3 | Open pit | Jan 2028 | In production | 1984 | Ownership | ||||||||||||||||||||||||||||||
| (1) | “In production” refers to sites that are currently producing iron ore. |
The table below summarizes our ROM iron ore and iron ore concentrate production for the periods indicated.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Mine | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | Tonnes | Grade (% Fe) | ||||||||||||||||||||||||||||||||||||
| (In millions of tonnes)(1) | (In millions of tonnes)(1) | |||||||||||||||||||||||||||||||||||||||||||||||
Korshunovsky Open Pit | 3.6 | 23.2 | % | 4.1 | 23.6 | % | 3.3 | 24.2 | % | 3.2 | 24.8 | % | 3.6 | 23.4 | % | 3.6 | 23.2 | % | ||||||||||||||||||||||||||||||
Rudnogorsky Open Pit | 4.4 | 26.2 | % | 4.1 | 27.9 | % | 4.5 | 30.6 | % | 3.3 | 34.0 | % | 3.2 | 27.8 | % | 4.4 | 26.2 | % | ||||||||||||||||||||||||||||||
Total ore production | 8.0 | 24.8 | % | 8.2 | 25.8 | % | 7.8 | 27.9 | % | 6.5 | 29.4 | % | 6.8 | 25.5 | % | 8.0 | 24.8 | % | ||||||||||||||||||||||||||||||
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Iron ore concentrate production | 2.5 | 62.8 | % | 2.7 | 62.8 | % | 2.7 | 63.2 | % | 2.5 | 62.7 | % | 2.0 | 62.8 | % | 2.5 | 62.8 | % | ||||||||||||||||||||||||||||||
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| (1) | Volumes are reported on a wet basis. |
In 2011-2012, we obtainedYakutugol holds the subsoil licenseslicense for threethe Sutamskaya iron ore deposits: the Pionerskoye deposit, the Sivaglinskoye deposit and the Sutamskaya area which are held by Yakutugol. The Pionerskoye deposit is located in Yakutia about 127 kilometers from the town of Neryungri. The area is well connected to the regional transportation network with a federal motorway located 5 kilometers to the east of the deposit. The Sivaglinskoye deposit is 120 kilometers away from Neryungri and located close to the Pionerskoye deposit.South Yakutia. The Sutamskaya area is located 210 kilometers south-east of Neryungri. These deposits containThis deposit contains high-quality iron ore, which will allow to produceproduction of iron ore concentrate with 65% iron content.
The table below sets forth certain information regarding the subsoil licenseslicense for our Yakutugol iron ore deposits, all of which are held by our subsidiary Yakutugol.deposit.
Deposit | License (plot) | Area (sq. km) | Mining Method | License Expiry Date | Status(1) | Year Production Commenced | Surface Land Use Rights | |||||||||||||||
|  03034  (Pionersk) | |||||||||||||||||||||
| 03153 (Sivaglinsk) | |||||||||||||||||||||
Sutamskaya area |  03158  (Sutamskaya area) | 731.32 | Open pit | Mar 2037 | No activity | n/a | — | |||||||||||||||
Sales of mining segment products
The following table sets forth sales of mining segment products (by volume) and as a percentage of total sales of these products (including intra-group sales) for the periods indicated.
Product | 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||||||||
| (In thousands of tonnes)(1) | (% of total sales, including intra-group) | (In thousands of tonnes)(1) | (% of total sales, including intra-group) | |||||||||||||||||||||||||||||||||||||||||||||
Coking coal concentrate | 4,796.8 | 5,784.0 | 5,246.0 | 60.4 | % | 66.8 | % | 63.9 | % | 4,302.9 | 4,257.7 | 4,796.8 | 60.1 | % | 59.6 | % | 60.4 | % | ||||||||||||||||||||||||||||||
Steam coal and middlings | 5,403.9 | 5,927.2 | 4,880.3 | 88.0 | % | 84.7 | % | 74.4 | % | 4,490.9 | 4,537.9 | 5,403.9 | 86.7 | % | 85.8 | % | 88.0 | % | ||||||||||||||||||||||||||||||
PCI and Anthracite | 2,865.0 | 3,139.0 | 4,066.7 | 93.1 | % | 92.6 | % | 94.0 | % | 1,965.0 | 2,205.5 | 2,865.0 | 91.3 | % | 91.7 | % | 93.1 | % | ||||||||||||||||||||||||||||||
Iron ore concentrate | 30.2 | 26.3 | 488.9 | 1.2 | % | 1.0 | % | 17.4 | % | 192.7 | 139.8 | 30.2 | 7.5 | % | 7.1 | % | 1.2 | % | ||||||||||||||||||||||||||||||
Coke | 770.6 | 893.5 | 984.8 | 28.7 | % | 31.5 | % | 33.8 | % | 945.2 | 696.6 | 770.6 | 37.4 | % | 28.5 | % | 28.7 | % | ||||||||||||||||||||||||||||||
Chemical products | 140.0 | 146.3 | 154.7 | 93.3 | % | 96.4 | % | 98.8 | % | 135.7 | 130.8 | 140.0 | 91.4 | % | 95.8 | % | 93.3 | % | ||||||||||||||||||||||||||||||
| (1) | Includes resale of mining segment products purchased from third parties. |
The following table sets forth revenues by product, as further divided between domestic sales and exports (including as a percentage of total mining segment revenues) for the periods indicated. We define exports as sales by our Russian and foreign subsidiaries to customers located outside their respective countries. We define
domestic sales as sales by our Russian and foreign subsidiaries to customers located within their respective countries. See note 2625 to the consolidated financial statements.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Product | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
Coking coal concentrate | 43,656.4 | 43.6 | % | 38,743.9 | 43.2 | % | 27,209.6 | 33.7 | % | 37,963.5 | 40.8 | % | 43,633.3 | 45.0 | % | 43,656.4 | 43.6 | % | ||||||||||||||||||||||||||||||
Domestic Sales | 20.4 | % | 21.6 | % | 28.0 | % | 18.9 | % | 17.8 | % | 20.4 | % | ||||||||||||||||||||||||||||||||||||
Export | 79.6 | % | 78.4 | % | 72.0 | % | 81.1 | % | 82.2 | % | 79.6 | % | ||||||||||||||||||||||||||||||||||||
Steam coal | 13,446.7 | 13.4 | % | 12,587.3 | 14.1 | % | 7,236.0 | 9.0 | % | 12,058.5 | 13.0 | % | 9,935.0 | 10.2 | % | 13,446.7 | 13.4 | % | ||||||||||||||||||||||||||||||
Domestic Sales | 15.2 | % | 17.1 | % | 30.0 | % | 13.5 | % | 13.7 | % | 15.2 | % | ||||||||||||||||||||||||||||||||||||
Export | 84.8 | % | 82.9 | % | 70.0 | % | 86.5 | % | 86.3 | % | 84.8 | % | ||||||||||||||||||||||||||||||||||||
PCI and Anthracite | 21,436.7 | 21.4 | % | 18,737.1 | 20.9 | % | 24,989.9 | 31.0 | % | 15,767.3 | 17.0 | % | 19,687.1 | 20.3 | % | 21,436.7 | 21.4 | % | ||||||||||||||||||||||||||||||
Domestic Sales | 2.3 | % | 1.3 | % | 1.3 | % | 0.5 | % | 2.3 | % | 2.3 | % | ||||||||||||||||||||||||||||||||||||
Export | 97.7 | % | 98.7 | % | 98.7 | % | 99.5 | % | 97.7 | % | 97.7 | % | ||||||||||||||||||||||||||||||||||||
Middlings | 5,800.9 | 5.8 | % | 5,189.8 | 5.8 | % | 4,750.5 | 5.9 | % | 6,180.9 | 6.6 | % | 6,766.9 | 7.0 | % | 5,800.9 | 5.8 | % | ||||||||||||||||||||||||||||||
Domestic Sales | 43.2 | % | 68.0 | % | 55.2 | % | 11.1 | % | 68.6 | % | 43.2 | % | ||||||||||||||||||||||||||||||||||||
Export | 56.8 | % | 32.0 | % | 44.8 | % | 88.9 | % | 31.4 | % | 56.8 | % | ||||||||||||||||||||||||||||||||||||
Coke | 11,379.3 | 11.4 | % | 9,341.5 | 10.4 | % | 9,428.9 | 11.7 | % | 15,195.8 | 16.3 | % | 11,243.6 | 11.6 | % | 11,379.3 | 11.4 | % | ||||||||||||||||||||||||||||||
Domestic Sales | 47.8 | % | 64.1 | % | 53.9 | % | 30.2 | % | 22.3 | % | 47.8 | % | ||||||||||||||||||||||||||||||||||||
Export | 52.2 | % | 35.9 | % | 46.1 | % | 69.8 | % | 77.7 | % | 52.2 | % | ||||||||||||||||||||||||||||||||||||
Chemical products | 2,367.9 | 2.4 | % | 1,988.0 | 2.2 | % | 2,327.4 | 2.9 | % | 2,774.1 | 3.0 | % | 2,961.5 | 3.1 | % | 2,367.9 | 2.4 | % | ||||||||||||||||||||||||||||||
Domestic Sales | 59.6 | % | 54.8 | % | 55.4 | % | 72.9 | % | 65.8 | % | 59.6 | % | ||||||||||||||||||||||||||||||||||||
Export | 40.4 | % | 45.2 | % | 44.6 | % | 27.1 | % | 34.2 | % | 40.4 | % | ||||||||||||||||||||||||||||||||||||
Iron ore concentrate | 220.2 | 0.2 | % | 125.9 | 0.1 | % | 1,844.0 | 2.3 | % | 1,179.0 | 1.3 | % | 838.9 | 0.9 | % | 220.2 | 0.2 | % | ||||||||||||||||||||||||||||||
Domestic Sales | 100.0 | % | 100.0 | % | 7.6 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||||||||||||||
Export | 0.0 | % | 0.0 | % | 92.4 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||||||||||||
Other(1) | 1,821.2 | 1.8 | % | 2,934.6 | 3.3 | % | 2,846.0 | 3.5 | % | 1,876.5 | 2.0 | % | 1,816.0 | 1.9 | % | 1,821.2 | 1.8 | % | ||||||||||||||||||||||||||||||
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Total | 100,129.3 | 100.0 | % | 89,648.1 | 100.0 | % | 80,632.3 | 100.0 | % | 92,995.6 | 100.0 | % | 96,882.3 | 100.0 | % | 100,129.3 | 100.0 | % | ||||||||||||||||||||||||||||||
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Domestic Sales | 22.2 | % | 25.4 | % | 25.9 | % | 19.8 | % | 21.0 | % | 22.2 | % | ||||||||||||||||||||||||||||||||||||
Export | 77.8 | % | 74.6 | % | 74.1 | % | 80.2 | % | 79.0 | % | 77.8 | % | ||||||||||||||||||||||||||||||||||||
| (1) | Includes revenues from transportation, distribution, construction and other miscellaneous services provided to local customers. |
Marketing and distribution
In 2017,2019, our Russian domestic sales were conducted directly by our own production facilities, and our export sales were conducted by Mechel Carbon, based in Baar, Switzerland. We generally do not involve traders in the sales and distribution of our mining products and we have had long-standing relationships with end users of our mining products.
The following table sets forth percentage of sales revenue by the regions in which our mining segment products were sold for the periods indicated.
Region(1) | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
Asia | 61.3 | % | 58.2 | % | 47.5 | % | 64.4 | % | 60.8 | % | 61.3 | % | ||||||||||||
Russia | 22.2 | % | 25.4 | % | 25.9 | % | 19.8 | % | 21.0 | % | 22.2 | % | ||||||||||||
Europe | 11.6 | % | 11.3 | % | 19.6 | % | 11.7 | % | 12.9 | % | 11.6 | % | ||||||||||||
CIS | 2.5 | % | 2.1 | % | 2.7 | % | 2.1 | % | 2.3 | % | 2.5 | % | ||||||||||||
Middle East(2) | 2.0 | % | 0.8 | % | 3.2 | % | 2.0 | % | 3.0 | % | 2.0 | % | ||||||||||||
United States | 0.0 | % | 0.3 | % | 0.3 | % | ||||||||||||||||||
Other | 0.4 | % | 1.9 | % | 0.8 | % | 0.0 | % | 0.0 | % | 0.4 | % | ||||||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
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| (1) | The regional breakdown of sales is based on the geographic location of our customers, and not on the location of the end users of our products, as our customers are often distributors that resell and, in some cases, further export our products. |
| (2) | Includes Turkey |
The following table sets forth information about the five largest customers of our mining segment, which together accounted for approximately 37.6%33.5% of our total mining segment sales in 2017.2019.
Customer | % of Total Mining Segment Sales | Product | % of Total Products Sales | % of Total Mining Segment Sales | Product | % of Total Products Sales | ||||||||||||||
POSCO | 10.6 | % | PCI and Anthracite | 22.1 | % | 12.1 | % | Coking coal concentrate | 16.4 | % | ||||||||||
| Coking coal concentrate | 13.3 | % | PCI and Anthracite | 31.2 | % | |||||||||||||||
| Middlings | 1.7 | % | Middlings | 2.1 | % | |||||||||||||||
Sojitz Corporation | 9.7 | % | Coking coal concentrate | 17.6 | % | 9.9 | % | Coking coal concentrate | 19.9 | % | ||||||||||
| PCI and Anthracite | 9.2 | % | PCI and Anthracite | 10.6 | % | |||||||||||||||
MMK | 4.8 | % | Coking coal concentrate | 11.2 | % | |||||||||||||||
| Iron ore concentrate | 18.9 | % | ||||||||||||||||||
Nippon Steel Corporation | 3.6 | % | PCI and Anthracite | 11.0 | % | |||||||||||||||
| Steam coal | 0.04 | % | Coking coal concentrate | 4.2 | % | |||||||||||||||
Batek Resources | 7.6 | % | Steam coal | 50.3 | % | 3.1 | % | Steam coal | 20.8 | % | ||||||||||
| Middlings | 14.6 | % | Middlings | 5.6 | % | |||||||||||||||
MMK | 5.0 | % | Coking coal concentrate | 11.5 | % | |||||||||||||||
| Iron ore concentrate | 7.9 | % | ||||||||||||||||||
ArcelorMittal | 4.6 | % | PCI and Anthracite | 21.5 | % | |||||||||||||||
Domestic sales
We ship our coking coal concentrate from our coal washing facilities, located near our coal mines, by rail directly to our customers, including steel producers. In 2017,2019, our largest domestic customer for our coking coal concentrate was MMK, accounting for 11.5%11.2% of our total coking coal concentrate sales and 5.0%4.6% of our total mining segment sales.
We sell coking coal concentrate domestically on the basis of annual framework contracts with monthly or quarterly adjustments to price and quantity.
We ship our steam coal from our warehouses by rail directly to our customers, which are predominantly local municipal services and electric power stations. Our supply contracts for steam coal are generally concluded with customers on a long-term basis with quantities and prices either fixed for the whole term or adjusted monthly. Some of our steam coal is consumed within our group; for example, sales of steam coal and middlings from our Southern Kuzbass Coal Company to our Southern Kuzbass Power Plant were 564.1RUB 587.5 million rubles in 2017.2019. In total, 179.0163.7 thousand tonnes of steam coal was sold within our group in 2017.2019. SUE HCS Sakha Republic
(Yakutia) is our largest domestic customer of steam coal, accounting for 6.6%6.3% of our total steam coal sales and 0.9%0.8% of our total mining segment sales in 2017.2019.
Iron
We ship our iron ore concentrate is shipped by rail directly from our Korshunov Mining Plant to customers. In 2017,2019, iron ore concentrate was sold primarily within our group. We set our prices on a monthly basis, which is in line with the current practice in the Russian market of iron ore feed.
The majority of coke is sold domestically to our subsidiaries Chelyabinsk Metallurgical Plant and Bratsk Ferroalloy Plant, which accounted for 71.3%62.6% of our total coke sales (including intra-group sales) by volume in 2017.2019. Major third partythird-party customers include pig iron, steel and ferroalloy producers located in the Central Region and in the Urals of Russia. Generally, sales in Russia are conducted pursuant to framework agreements with monthly adjustments of quantities and prices.
Our subsidiary Mecheltrans is a railway freight forwarding company, which owns its own rail rolling stock, consisting of 1,8661,736 open cars and 5721 pellet cars, and leases 3,9219,035 open cars 127 hopper pellet cars and 243 dumpcars under operating leases and 5,004 open cars under finance leases.277 dumpcars. In 2017,2019, Mecheltrans transported domestically approximately 23.819.0 million tonnes of our cargo, approximately 67.2%70.1% of which was comprised of coal and iron ore concentrate.feed.
Export sales
We export coking coal concentrate, PCI and anthracite, steam coal and coke and chemical products.
In 2017,2019, the largest foreign customer of our mining segment was POSCO, accounting for 10.6%12.1% of our total mining segment sales. POSCO purchases consisted of PCI, coking coal concentrate and middlings.
We were Russia’s thirdsecond largest exporter of coking coal concentrate in 2017,2019, according to MMI. Our exports of coking coal concentrate arewent primarily to Japan, China Japan and South Korea.Korea in 2019. In 2017,2019, Sojitz Corporation, POSCO, Baosteel Group Corporation,Kobe Steel, Yancheng Materials Group Co., Ltd. and KobeNippon Steel Ltd.Corporation were our largest foreign customers of coking coal concentrate, accounting for 51.8% of our total coking coal concentrate sales and 22.6%21.2% of our total mining segment sales. Shipments are generally made by rail to seaports and further by sea, except for certain shipments to Eastern Europe and northeast China that are made only by rail.
OurIn 2019, our exports of PCI and anthracite arewere primarily to Europe, South Korea, Japan, Europe and China,Turkey, which together accounted for 92.9%93.6% of our total PCI and anthracite sales and 19.9%15.9% of our total mining segment sales in 2017.sales. In 2017,2019, our largest foreign customers of PCI and anthracite were POSCO, ArcelorMittal, Nippon Steel Corporation, Sojitz Corporation Sumitomo Corporation and Mitsui & Co.Eregli Demir ve Celik Fabrikalari T.A.S.
OurIn 2019, our exports of steam coal arewere primarily to Vietnam, China Japan and South Korea,Japan, which together accounted for 83.0%81.1% of our total steam coal sales and 11.1%10.5% of our total mining segment sales in 2017.sales. In 2017,2019, our largest foreign customers of steam coal were Batek Resources, Limited, Sumitomo Corporation, Shandong Huanxin Products,Galaxy Energy and Resources, Itochu Corporation, Global Transit and Dongseo Co., Ltd.Duferco SA.
PCI, anthracite and steam coal are shipped to customers from our warehouses by rail and further by sea from Russian and Baltic ports.sea.
In 2017,2019, we used annual contracts for export sales of coal. Coal not shipped under annual contracts was sold on the spot market primarily to Chinese customers.market.
We exportIn 2019, we exported coke, including coke breeze, and chemical products primarily to Europe, which accounted for 31.1%34.5% of our total coke and chemical products sales and 3.5%6.7% of our total mining segment sales in 2017.sales.
From Port Posiet, we shipshipped primarily coking coal concentrate, steam coal and PCI to Japan, South Korea and China.China in 2019. In 2017,2019, our Port Posiet processed 5.9approximately 5.7 million tonnes of coal;coal with its warehousing capacity is limited to 200 thousand tonnes per month forone-time storage of no more than four grades of coal. In order to expand the cargo-handling capacity of the port, we constructed a modern transshipment complex and put into operation a mechanized coal loosening complex. The first stage of the Port Posiet’s modernization enabled
us to expand the cargo-handling capacity of the port up to 7.0 million tonnes per annum in 2016. Further modernization envisagesWe further envisage the construction of a deepwater berth and an approach channel, as well as the installation of a shiploader. The port’s proximity to roads and rail links to key product destinations and transshipment points in China and Russia make it a cost-effective link in the logistical chain for bringing our coal products to the market.
In 2017,2019, Mecheltrans transported for export approximately 11.910.2 million tonnes of our cargo, approximately 88.4%88.7% of which was comprised of coal.
Market share and competition
Coal
According to the Central Dispatching Department, in 2017,2019, the Russian coal mining industry was represented by 180182 companies, which operated 6159 underground mines and 119123 open pit mines. As a result of the privatization of 1990s and subsequent mergers and acquisitions, the Russian coal mining industry has become more concentrated. Based on the Central Dispatching Department’s data and our estimates, the ten largest coal mining companies in Russia produced approximately 73%69% of the overall coal production volume in 2017.2019.
According to data from the Central Dispatching Department, from companies’ websites and from our estimates, in 2017,2019, we were the second largest coking coal producer in Russia, with a 16.9%12.5% share of total coking coal production by volume, and we had a 5.0%4.3% market share with respect to overall Russian coal production by volume. The following table lists the main Russian coking coal producers in 2017,2019, the industrial groups to which they belong, their coking coal production volumes and their share of total Russian production volume.
Group | Company | Coking Coal Production (Thousands of Tonnes) | % of Coking Coal Production by Volume | Company | Coking Coal Production (Thousands of Tonnes) | % of Coking Coal Production by Volume | ||||||||||||||||
EVRAZ plc | Raspadskaya PAO | 11,435 | 13.5 | % | Raspadskaya PAO | 12,834 | 13.0 | % | ||||||||||||||
| Yuzhkuzbassugol Coal Company OAO | 10,967 | 13.0 | % | UCC Yuzhkuzbassugol JSC | 12,180 | 12.3 | % | |||||||||||||||
| EVRAZ Total | 22,402 | 26.5 | % | EVRAZ Total | 25,014 | 25.3 | % | |||||||||||||||
Mechel PAO | Yakutugol JSHC | 7,312 | 8.6 | % | Southern Kuzbass Coal Company PJSC | 4,922 | 5.0 | % | ||||||||||||||
| Southern Kuzbass Coal Company PAO | 3,517 | 4.2 | % | Yakutugol JSHC | 4,821 | 4.9 | % | |||||||||||||||
| Elgaugol OOO | 3,466 | 4.1 | % | Elgaugol OOO | 2,639 | 2.7 | % | |||||||||||||||
| Mechel Total | 14,295 | 16.9 | % | Mechel Total | 12,382 | 12.5 | % | |||||||||||||||
Severstal PAO | Vorkutaugol AO | 8,685 | 10.3 | % | Vorkutaugol AO | 10,145 | 10.2 | % | ||||||||||||||
CC Kolmar LLC | GOK Denisovskiy JSC | 4,665 | 4.7 | % | ||||||||||||||||||
| GOK Inaglinskiy JSC | 2,484 | 2.5 | % | |||||||||||||||||||
| Kolmar Total | 7,149 | 7.2 | % | |||||||||||||||||||
Sibuglemet Holding | Mezhdurechye AO | 4,251 | 5.0 | % | Mezhdurechye AO | 4,757 | 4.8 | % | ||||||||||||||
| Bolshevik Mine AO | 1,224 | 1.5 | % | Bolshevik Mine AO | 1,440 | 1.5 | % | |||||||||||||||
| Antonovskaya Mine AO | 681 | 0.8 | % | Antonovskaya Mine AO | 765 | 0.8 | % | |||||||||||||||
| Sibuglemet Total | 6,156 | 7.3 | % | Sibuglemet Total | 6,962 | 7.1 | % | |||||||||||||||
UMMC | Kuzbassrazrezugol Coal Company OAO | 6,155 | 7.3 | % | ||||||||||||||||||
Other | 26,813 | 31.7 | % | 37,219 | 37.6 | % | ||||||||||||||||
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Total | 84,506 | 100.0 | % | 98,871 | 100.0 | % | ||||||||||||||||
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| Source: | Central Dispatching Department, companies’ websites and our estimates. |
According to Metal Expert, in 2017, we were the tenth largest2019, our share of Russia’s total production volume of steam coal producer in Russia, with a 1.6% share of total production by volume.was 1.8%. The main Russian steam coal producers that occupy a substantial share in the Russian steam coal industry include SUEK, UMMC (Kuzbassrazrezugol Coal Company) andSDS-Coal, accounting for 56.4%53.4% of total steam coal production in 2017,2019, according to Metal Expert.
In the domestic coal market, we compete primarily on the basis of price, as well as on the basis of the quality of coal, which in turn depends upon the quality of our production assets and the quality of our mineral reserves. Competition in the steam coal market is also affected by the fact that most power stations were built near specific steam coal sources and had their equipment customized to utilize the particular type of coal produced at the relevant local source. Outside of Russia, competition in the steam coal market is largely driven by coal quality, including volatile matter and calorie content.
Iron ore
The Russian iron ore market is generally characterized by high demand and limited sources of supply, with product quality as the main factor driving prices. According to Metal Expert, the market is dominated by relatively few producers, with the top three mining groups being Metalloinvest, NLMK and Severstal, representing 70.4% of total iron ore concentrate production. WeAccording to Metal Expert, we were sixth in production volume in 20172019 with 2.5 million tonnes of iron ore concentrate, representing 2.5%2.4% of total production of iron ore concentrate in Russia.
Mineral reserves
Our coal and iron ore reserves are based on exploration drilling and geological data, and are that part of a mineral deposit which could be economically and legally extracted or produced at the time of the reserve determination. Each year we update our reserve calculations based on actual production and other factors, including economic viability and any new exploration data. Our coal and iron ore reserves are presented in accordance with the criteria for internationally recognized reserve and resource categories of the “Australasian Code for Reporting Mineral Resources and Ore Reserves” (as amended) published by the Joint Ore Reserves Committee (“JORC”) of the Australasian Institute of Mining and Metallurgy, Australian Institute of Geoscientists and the Minerals Council of Australia (the “JORC Code”), and meet the standards set by the SEC in its Industry Guide 7. Information on our mineral reserves has been prepared by our internal mining engineers as of December 31, 2017.2019. To prepare this information our internal mining engineers used resource and reserve estimates, actual and forecast production, operating costs, capital costs, geological plan maps, geological cross sections, mine advance maps in plan and cross section and price projections.
Our coal and iron ore reserve estimates contained herein inherently include a degree of uncertainty and depend to some extent on geological assumptions and statistical inferences which may ultimately prove to have been unreliable. Consequently, reserve estimates should be regularly revised based on actual production experience or new information and should therefore be expected to change. Notably, should we encounter mineralization or formations different from those predicted by past drilling, sampling and similar examinations, reserve estimates may have to be adjusted and mining plans may have to be altered in a way that might adversely affect our operations. Moreover, if the price of metallurgical coal, steam coal or iron ore declines, or stabilizes at a price lower than recent levels, or if production costs increase or recovery rates decrease, it may become uneconomical to recover reserves containing relatively lower grades of mineralization and consequently our reserves may decrease. Conversely, should the price of metallurgical coal, steam coal or iron ore stabilize at a materially higher price than currently assumed, or if production costs decrease or recovery rates increase, it may become economical to recover material at lower grades than that assumed here and consequently our reserves may increase.
The calculation of our reserves in Russia is based on the expected operational life of each deposit based onlife-of-mine plans, which in many cases exceed the relevant license period for the deposit. Russian subsoil
licenses are issued for defined boundaries and specific periods, generally about 20 years. Our declared reserves are contained within the current license boundary. Our Russian subsoil licenses expire on dates falling in 20202021 through 2037. However, in many cases, the life of the deposit is well beyond the license term. Based on Russian law and practice, as evidenced by our experience and publicly available information, including a number of court cases, it is reasonably likely that an incumbent subsoil user will be granted license extension through the end of
the expected operational life of the deposit, provided that the licensee is not in violation of the material terms of the license. The cost for the license extension is not substantial. See “— Regulatory Matters — Subsoil Licensing in Russia — Extension of licenses.” We have received extension of certain of our subsoil licenses which expired and we intend to extend the licenses for all deposits expected to remain productive subsequent to their license expiry dates. However, license extension is not guaranteed and is to a certain extent subject to the discretion of regulatory authorities. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — Our business could be adversely affected if we fail to obtain or extend necessary subsoil licenses and permits or fail to comply with the terms of our subsoil licenses and permits,” “Item 3. Key Information — Risk Factors — Risks Relating to the Russian Federation — Legal risks and uncertainties — Deficiencies in the legal framework relating to subsoil licensing subject our licenses to the risk of governmental challenges and, if our licenses are suspended or terminated, we may be unable to realize our reserves, which could materially adversely affect our business, financial condition, results of operations and prospects”permits” and “— Regulatory Matters — Subsoil Licensing in Russia.”
As of December 31, 2017,2019, we had coal reserves totaling 2,972.32,934.6 million tonnes, of which approximately 76% was coking coal. The table below summarizes our coal reserves as of December 31, 2017.2019.
Company | Proved Reserves(1) | Probable Reserves(1) | Total | % in Open Pit | Proved Reserves(1) | Probable Reserves(1) | Total | % in Open Pit | ||||||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||||||
Yakutugol | 189,215 | 555 | 189,770 | 100.0 | % | 176,392 | 555 | 176,947 | 100.0 | % | ||||||||||||||||||||||
Elgaugol | 1,731,897 | 503,461 | 2,235,358 | 100.0 | % | 1,722,656 | 503,461 | 2,226,117 | 100.0 | % | ||||||||||||||||||||||
Southern Kuzbass Coal Company | 521,284 | 25,849 | 547,133 | 79.1 | % | 505,753 | 25,786 | 531,539 | 79.1 | % | ||||||||||||||||||||||
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Total | 2,442,396 | 529,865 | 2,972,261 | 96.2 | % | 2,404,801 | 529,802 | 2,934,603 | 96.2 | % | ||||||||||||||||||||||
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| (1) | Reserves include adjustments for loss and dilution modifying factors. |
The table below summarizes our reserves by coal type as of December 31, 2017.2019.
Company | Category | Coking Coal | Steam Coal | Anthracite | Lignite | Total(1) | Category | Coking Coal | Steam Coal | Anthracite | Lignite | Total(1) | ||||||||||||||||||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||||||||||||||||||||||
| Proved | 97,820 | 8,444 | 0 | 82,951 | 189,215 | Proved | 86,643 | 7,142 | 0 | 82,607 | 176,392 | |||||||||||||||||||||||||||||||||||||
| Probable | 263 | 292 | 0 | 0 | 555 | Probable | 263 | 292 | 0 | 0 | 555 | |||||||||||||||||||||||||||||||||||||
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Yakutugol | Total | 98,083 | 8,736 | 0 | 82,951 | 189,770 | Total | 86,906 | 7,434 | 0 | 82,607 | 176,947 | ||||||||||||||||||||||||||||||||||||
| Proved | 1,471,809 | 260,088 | 0 | 0 | 1,731,897 | Proved | 1,465,540 | 257,116 | 0 | 0 | 1,722,656 | |||||||||||||||||||||||||||||||||||||
| Probable | 462,257 | 41,204 | 0 | 0 | 503,461 | Probable | 462,257 | 41,204 | 0 | 0 | 503,461 | |||||||||||||||||||||||||||||||||||||
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Elgaugol | Total | 1,934,066 | 301,292 | 0 | 0 | 2,235,358 | Total | 1,927,797 | 298,320 | 0 | 0 | 2,226,117 | ||||||||||||||||||||||||||||||||||||
| Proved | 207,555 | 201,313 | 112,416 | 0 | 521,284 | Proved | 200,820 | 195,217 | 109,716 | 0 | 505,753 | |||||||||||||||||||||||||||||||||||||
| Probable | 18,529 | 7,217 | 103 | 0 | 25,849 | Probable | 18,529 | 7,154 | 103 | 0 | 25,786 | |||||||||||||||||||||||||||||||||||||
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Southern Kuzbass Coal Company | Total | 226,084 | 208,530 | 112,519 | 0 | 547,133 | Total | 219,349 | 202,371 | 109,819 | 0 | 531,539 | ||||||||||||||||||||||||||||||||||||
| Proved | 1,777,184 | 469,845 | 112,416 | 82,951 | 2,442,396 | Proved | 1,753,003 | 459,475 | 109,716 | 82,607 | 2,404,801 | |||||||||||||||||||||||||||||||||||||
| Probable | 481,049 | 48,713 | 103 | 0 | 529,865 | Probable | 481,049 | 48,650 | 103 | 0 | 529,802 | |||||||||||||||||||||||||||||||||||||
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Total | 2,258,233 | 518,558 | 112,519 | 82,951 | 2,972,261 | 2,234,052 | 508,125 | 109,819 | 82,607 | 2,934,603 | ||||||||||||||||||||||||||||||||||||||
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| (1) | Reserves include adjustments for loss and dilution modifying factors. |
The table below sets forth reserves attributable to our Yakutugol mines as of December 31, 2017.2019.
Mine | Proved Reserves | Probable Reserves | Total(1)(2) | Heat Value(3) | % Sulfur | Proved Reserves | Probable Reserves | Total(1)(2) | Heat Value(3) | % Sulfur | ||||||||||||||||||||||||||||||
| (In thousands of tonnes) | (In kcal/kg) | (In thousands of tonnes) | (In kcal/kg) | |||||||||||||||||||||||||||||||||||||
Neryungrinsky Open Pit(4)(5) | 103,580 | 555 | 104,135 | 8,794 | 0.11 - 0.30 | 91,825 | 555 | 92,380 | 8,794 | 0.11 - 0.30 | ||||||||||||||||||||||||||||||
Kangalassky Open Pit(5) | 82,951 | 0 | 82,951 | 6,834 | 0.40 | 82,607 | 0 | 82,607 | 6,834 | 0.40 | ||||||||||||||||||||||||||||||
Dzhebariki-Khaya Open Pit(5) | 2,684 | 0 | 2,684 | 7,500 | 0.22 | 1,960 | 0 | 1,960 | 7,500 | 0.23 | ||||||||||||||||||||||||||||||
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Total | 189,215 | 555 | 189,770 | 176,392 | 555 | 176,947 | ||||||||||||||||||||||||||||||||||
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| (1) | Reserves reported on a wetin-situ basis and include adjustments for loss and dilution modifying factors. |
| (2) | These reserves amounts are based on the quantities that could be extracted economically using current operating costs and certain estimated future prices. In estimating the reserves, we used the following average prices: |
| (3) | Heat value is reported on a moisture- andash-free basis. |
| (4) | Mined coking coal is processed at Neryungrinskaya Washing Plant with a weighted average yield of coking coal concentrate of |
| (5) | Steam coal is sold as ROM without processing. |
The table below sets forth reserves attributable to our Elgaugol mine as of December 31, 2017.2019.
Mine | Proved Reserves | Probable Reserves | Total(1)(2) | Heat Value(3) | % Sulfur | Proved Reserves | Probable Reserves | Total(1)(2) | Heat Value(3) | % Sulfur | ||||||||||||||||||||||||||||||
| (In thousands of tonnes) | (In kcal/kg) | (In thousands of tonnes) | (In kcal/kg) | |||||||||||||||||||||||||||||||||||||
Elga Open Pit(4) | 1,731,897 | 503,461 | 2,235,358 | 7,000-8,600 | 0.25 | 1,722,656 | 503,461 | 2,226,117 | 7,000-8,600 | 0.25 | ||||||||||||||||||||||||||||||
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Total | 1,731,897 | 503,461 | 2,235,358 | 1,722,656 | 503,461 | 2,226,117 | ||||||||||||||||||||||||||||||||||
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| (1) | Reserves reported on a wetin-situ basis and include adjustments for loss and dilution modifying factors. |
| (2) | These reserves amounts are based on the quantities that could be extracted economically using current operating costs and certain estimated future prices. In estimating the reserves, we used the following average prices: |
| (3) | Heat value is reported on a moisture- andash-free basis. |
| (4) | Mined coal is processed at Elginskaya Washing Plant and Sibir Washing Plant with a weighted average yield of concentrate of |
The table below sets forth reserves attributable to our Southern Kuzbass mines as of December 31, 2017.2019.
Mine | Proved Reserves | Probable Reserves | Total(1)(2)(3)(4) | Heat Value(5) | % Sulfur | Proved Reserves | Probable Reserves | Total(1)(2)(3)(4) | Heat Value(5) | % Sulfur | ||||||||||||||||||||||||||||||
| (In thousands of tonnes) | (In kcal/kg) | (In thousands of tonnes) | (In kcal/kg) | |||||||||||||||||||||||||||||||||||||
Krasnogorsky Open Pit | 194,490 | 194 | 194,684 | 8,100 | 0.33 | 188,402 | 194 | 188,596 | 8,100 | 0.33 | ||||||||||||||||||||||||||||||
Olzherassky Open Pit | 54,137 | 5,963 | 60,100 | 8,363 | 0.30 | 52,144 | 5,963 | 58,107 | 8,363 | 0.30 | ||||||||||||||||||||||||||||||
Tomusinsky Open Pit | 6,639 | 4,400 | 11,039 | 8,390 | 0.30 | 5,178 | 4,337 | 9,515 | 8,430 | 0.30 | ||||||||||||||||||||||||||||||
Sibirginsky Open Pit | 166,981 | 45 | 167,026 | 8,530 | 0.30 | 164,132 | 45 | 164,177 | 8,470 | 0.30 | ||||||||||||||||||||||||||||||
Sibirginskaya Underground | 38,935 | 4,024 | 42,959 | 8,477 | 0.28 | 38,322 | 4,024 | 42,346 | 8,513 | 0.28 | ||||||||||||||||||||||||||||||
V.I. Lenina Underground | 27,573 | 11,223 | 38,796 | 8,436 | 0.35 | 26,593 | 11,223 | 37,816 | 8,588 | 0.35 | ||||||||||||||||||||||||||||||
Olzherasskaya-Novaya Underground | 32,529 | 0 | 32,529 | 7,912 | 0.20 | 30,982 | 0 | 30,982 | 7,902 | 0.20 | ||||||||||||||||||||||||||||||
Yerunakovskaya-1 Underground (project)(6) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Yerunakovskaya-3 Underground (prospect)(7) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Olzherasskaya-Glubokaya Underground (prospect)(7) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Usinskaya Underground (prospect)(7) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
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Total | 521,284 | 25,849 | 547,133 | 505,753 | 25,786 | 531,539 | ||||||||||||||||||||||||||||||||||
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| (1) | Reserves reported on a wetin-situ basis and include adjustments for loss and dilution modifying factors. |
| (2) | These reserves amounts are based on the quantities that could be extracted economically using current operating costs and certain estimated future prices. In estimating the reserves, we used the following average prices (FCA basis): |
| (3) | Reserves are presented on an assumed 100% basis. |
| (4) | Mined coal is processed at Sibir Washing Plant, Kuzbasskaya Washing Plant, Tomusinskaya Washing Plant, Sibirginskaya Processing Unit and Krasnogorskaya Washing Plant with a weighted average yield of concentrate of |
| (5) | Heat value is reported on a moisture- andash-free basis. |
| (6) | The extraction is considered uneconomic based on a feasibility study developed in 2017. |
| (7) | Not considered in the review because these prospects presently do not have mine plans. |
As of December 31, 2017,2019, we had iron ore reserves (proved and probable) totaling 146.6133.7 million tonnes at an average iron grade of 26.4%26.9%. The table below summarizes iron ore reserves by mine as of December 31, 2017.2019.
Mine | Proved Reserves | Probable Reserves | Total(1)(2)(3) | Grade (Fe%)(4) | Proved Reserves | Probable Reserves | Total(1)(2)(3) | Grade (Fe%)(4) | ||||||||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||||||||||
Korshunovsky Open Pit | 52,363 | 32,892 | 85,255 | 23.7 | 50,020 | 28,827 | 78,847 | 24.2 | ||||||||||||||||||||||||
Rudnogorsky Open Pit | 34,361 | 26,967 | 61,328 | 30.1 | 30,866 | 23,992 | 54,858 | 30.8 | ||||||||||||||||||||||||
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Total | 86,724 | 59,859 | 146,583 | 26.4 | 80,886 | 52,819 | 133,705 | 26.9 | ||||||||||||||||||||||||
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| (1) | Reserves reported on a wetin-situ basis and include adjustments for loss and dilution modifying factors. |
| (2) | These reserves amounts are based on the quantities that could be extracted economically using current operating costs and certain estimated future prices. In estimating the reserves, we used the average price of |
| (3) | Reserves are presented on an assumed 100% basis. |
| (4) | Mined iron ore is processed at the Korshunovsky concentrating plant with a weighted average yield of iron ore concentrate |
Steel Segment
Our steel segment comprises the production and sale of semi-finished steel products, long products of a wide range of steel grades, carbon and stainless flat steel products and high value-added metal products, including wire products, stampings and forgings, structural shapes, beams and rails. Within these product groups, we are further able to tailor various steel grades to meet specificend-user requirements. It also comprises the production of ferrosilicon, both for internal use and for sales to third parties. Our steel segment is supported by our mining segment, which includes coke and iron ore concentrate.
Our steel segment has production facilities in Russia and Lithuania. Our total steel output was 4.33.6 million tonnes in 2017, 4.32019, 3.9 million tonnes in 20162018 and 4.3 million tonnes in 2015.2017. Our ferrosilicon production amounted to 66.9 thousand tonnes in 2019, 76.1 thousand tonnes in 2018 and 68.6 thousand tonnes in 2017, 88.5 thousand tonnes in 2016 and 92.9 thousand tonnes in 2015.2017.
Description of key products
Pig iron. Pig iron is an iron alloy with usual carbon content oftypically above 2%, which is produced from smelting iron ore feed (sinter, pellets and other ore materials) in the blast furnace. Liquid pig iron is used as an intermediate product in the manufacturing of steel. Pig iron in molten state and cold pig iron can be used as charging material for steel manufacturing in basic oxygen furnaces, electric arc furnaces and in the manufacturing of cast iron in cupolas. Cold pig iron is brittle. We sell small volumes of pig iron from our Chelyabinsk Metallurgical Plant to third parties.
Semi-finished products. Semi-finished products typically require further milling before they are useful to end consumers. We offer semi-finished billets, blooms and slabs. Billets and blooms are precursors to long products and have a square cross section. The difference between billets and blooms is that blooms have a larger cross-section which is more than eight inches and is broken down in the mill to produce rails,I-beams,H-beams and sheet piling. Slabs are precursors to flat products and have a rectangular cross section. Such types of products can be produced both by continuous casting of liquid steel and by casting of liquid steel in casting forms with subsequent drafting on blooming mills. We offer our customers billets and blooms produced by Izhstal and Chelyabinsk Metallurgical Plant, as well as slabs produced by Chelyabinsk Metallurgical Plant.
Long steel productsproducts.. Long steel products are rolled products used in many industrial sectors, particularly in the construction and engineering industries. They include various types of products, for example, rebar, structural shapes (channels, flange beams, rails, special sections and others), calibrated long steel products and wire rod, which could be supplied both in bars and coils in a wide range of sizes. Our long steel products are manufactured at Chelyabinsk Metallurgical Plant, Izhstal and Beloretsk Metallurgical Plant.
We offer our customers a wide selection of long products produced from various steel grades including rebar, calibrated long steel products, round rolled products, surface-conditioned rolled products, wire rod, as well as a wide range of structural shapes, including beams, channels, railsat Chelyabinsk Metallurgical Plant, Izhstal and others.Beloretsk Metallurgical Plant.
Flat steel products. Flat steel products are manufactured by multiple drafting slabs in forming rolls with subsequent coiling or cutting into sheets. Plates are shipped after hot rolling or heat treatment. Coiled stock can be subject to cutting lengthwise into slit coils or crosswise into sheets. Stainless steel is used to manufacture plates and cold-rolled sheets in coils and flat sheets.Hot-rolled plates and carbon and alloyed coiled rolled products are manufactured at Chelyabinsk Metallurgical Plant.
Stampings and forgings. Stampings are special parts stamped from metal billets. Forgings are special products made through the application of localized compressive forces to metal. Forged metal is stronger than cast or machined metal. Our stampings and forgings are offered on amade-to-order basis according to minimum batches depending on the products’ sizes. Our product offerings include rollers and axles used in vehicle manufacturing; gears and wheels; bars; and others. Our stampings and forgings are produced at Urals Stampings Plant, including its branch in Chelyabinsk.
Wire products. Wire products are the result of processing ofprocessed from wire rod whichand are ready for use in manufacturing and consumer applications. Our wire products are manufactured at Beloretsk Metallurgical Plant, Vyartsilya Metal Products Plant and Izhstal in Russia and Mechel Nemunas in Lithuania. Our wide-ranging wire products line includes spring wire; rope wire; bearing wire; microwire; precision alloy wire; high and low carbon concrete reinforcing wire; galvanized wire; copper-coated and bright welding wire; strand of various application; various types of nails; steel wire ropes specially engineered for the shipping, aerospace, oil and gas and construction industries; steel wire ropes for passenger and freight elevators; general-purpose wire; steel straps and clips; chain link fences; welded (reinforcing) meshes; and others.
Ferrosilicon. Ferrosilicon is used in ferrous metallurgy as a deoxidizer or as an alloying element for production of electrotechnical, spring wire, corrosion-resistant and heat resistant steel grades, or as a pig iron modifier. In nonferrous metallurgy, ferrosilicon is used as a reducing agent for production of nonferrous metals and alloys. We produce two types of ferrosilicon: with 65% and 75% silicon content in the alloy. We offer our customers ferrosilicon produced by Bratsk Ferroalloy Plant.
The following table sets out our production volumes by primary steel product categories and main products within these categories.
Product | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
| (In thousands of tonnes) | (In thousands of tonnes) | |||||||||||||||||||||||
Pig Iron | 4,029 | 4,053 | 4,065 | 3,326 | 3,690 | 4,029 | ||||||||||||||||||
Semi-Finished Steel Products, including: | 833 | 936 | 1,098 | 862 | 953 | 833 | ||||||||||||||||||
Carbon andLow-Alloyed Semi-Finished Products | 828 | 926 | 1,081 | 850 | 943 | 828 | ||||||||||||||||||
Long Steel Products, including: | 2,769 | 2,768 | 2,463 | 2,293 | 2,538 | 2,769 | ||||||||||||||||||
Stainless Long Products | 12 | 12 | 8 | 11 | 11 | 12 | ||||||||||||||||||
Alloyed Long Products | 65 | 127 | 121 | 26 | 30 | 65 | ||||||||||||||||||
Rebar | 1,319 | 1,509 | 1,543 | 1,047 | 1,200 | 1,319 | ||||||||||||||||||
Rails | 358 | 304 | 20 | 280 | 245 | 358 | ||||||||||||||||||
Structural Shapes | 411 | 213 | 155 | 415 | 455 | 411 | ||||||||||||||||||
Wire Rod | 241 | 249 | 230 | 159 | 219 | 241 | ||||||||||||||||||
Low-Alloyed Engineering Steel | 360 | 353 | 381 | 355 | 377 | 360 | ||||||||||||||||||
Flat Steel Products, including: | 477 | 464 | 481 | 323 | 318 | 477 | ||||||||||||||||||
Stainless Flat Products | 4 | 6 | 10 | 17 | 6 | 4 | ||||||||||||||||||
Carbon andLow-Alloyed Flat Products | 472 | 457 | 471 | 306 | 312 | 472 | ||||||||||||||||||
Forgings, including: | 40 | 41 | 47 | 39 | 49 | 40 | ||||||||||||||||||
Stainless Forgings | 2 | 3 | 3 | 1 | 1 | 2 | ||||||||||||||||||
Alloyed Forgings | 26 | 26 | 32 | 26 | 33 | 26 | ||||||||||||||||||
Carbon andLow-Alloyed Forgings | 12 | 11 | 12 | 12 | 15 | 12 | ||||||||||||||||||
Stampings | 95 | 75 | 69 | 108 | 143 | 95 | ||||||||||||||||||
Wire Products, including: | 575 | 602 | 628 | 529 | 577 | 575 | ||||||||||||||||||
Wire | 522 | 549 | 580 | 475 | 526 | 522 | ||||||||||||||||||
Ropes | 43 | 43 | 37 | 35 | 42 | 43 | ||||||||||||||||||
Steel manufacturing process and types of steel
The most common steel manufacturing processes are production in a basic oxygen furnace (“BOF”) and production in an electric arc furnace (“EAF”).
In BOF steel manufacturing, steel is produced with less than 2% carbon content. The principal raw materials used to produce steel are liquid pig iron and scrap metal. The molten steel, depending on the products in which it will be used, undergoes additional refining and is mixed with manganese, nickel, chrome, titanium and other components to give it special properties. Approximately 74%In 2019, approximately 73% of the world’s steel output iswas made in BOFs, according to Wood Mackenzie.
In EAF steel manufacturing, steel is generally produced from remelted scrap metal. Heat to melt the scrap metal is supplied from high-voltage electricity that arcs within the furnace between graphite electrodes and the scrap metal. This process is suitable for producing almost all steel grades, including stainless steel; however, it is limited in its use for production of high-purity carbon steel. Approximately 26%In 2019, approximately 27% of the world’s steel output iswas made in EAFs, according to Wood Mackenzie.
Steel products are broadly subdivided into two categories — flat and long products. Flat products arehot-rolled or cold-rolled coils and sheets that are used in the engineering, pipe and manufacturing industries, as well as in the white goods and automotive industries. Long products are used for construction-type applications (beams, rebar) and the engineering industry. To create flat and long products, molten steel is cast in continuous-casting machines or casting forms (molds). The molten steel crystallizes and turns into semi-finished products in the form of blooms, slabs or ingots. Ingots and blooms have a square cross-section and are used for further processing into long products. Slabs have a rectangular cross-section and are used to make flat products. All
semi-finished products are rolled at high temperatures, a process known as hot rolling. They are drawn and flattened through rollers to give
the metal the desired dimensions and strength properties. Some flat steel products go through an additional step of rolling without heating, a process known as cold rolling and is used to obtain certain mechanical properties of the steel. After cold rolling, annealing in reheating furnaces with cooling that stress-relieves the metal is periodically required. Oil may be applied to the metal surface for protection from rust.
The properties of steel (strength, solidity, plasticity, magnetization, corrosion-resistance) may be modified to render it suitable for its intended future use by the addition by smelting of small amounts of other metals into the structure of the steel, varying the steel’s chemical composition. For example, the carbon content of steel can be varied in order to change its plasticity, or chrome and nickel can be added to produce stainless steel. Resistance to corrosion can be achieved through application of special coatings (including polymeric coatings), galvanization, copper coating or tinning, painting and other treatments.
Ferrosilicon manufacturing process
Ferrosilicon is produced in EAFs in a continuous ore smelting process. Silicon is reduced from quartzite with coke and coal carbon and alloyed with steel cutting iron. Ferrosilicon is discharged from the furnace periodically. After cooling, metal ingots are split and sorted into various commercial fractions.
Steel segment production facilities
Most of our metallurgical plants have obtained a certificate of compliance of quality under management system with the requirements set by the International Organization for Standardization (“ISO international standards.”). For example, the main manufacturing processes at Chelyabinsk Metallurgical Plant, Izhstal, Beloretsk Metallurgical Plant and Urals Stampings Plant are ISO 9001:20082015 certified. Chelyabinsk Metallurgical Plant has also obtained a certificate of compliance with international standards of the environmental management system ISO 14001:2015 and a certificate of compliance with the international standard of the occupational health and safety management system BS OHSAS 18001:2007.
Chelyabinsk Metallurgical Plant
Chelyabinsk Metallurgical Plant is an integrated steel mill which produces flatlong and longflat carbon and stainless steel products, rail and beamstructural sections and semi-finished products. Semi-finished products are used for further processing in Russia or our internal needs. Chelyabinsk Metallurgical Plant also produces pig iron which is used in the manufacturing of steel. The plant sources all of its metallurgical coke needs from Mechel Coke and most of its iron ore concentrate needs from Korshunov Mining Plant. Its customer base is largely comprised of companies from the construction and railways construction and repair industries, as well as ferrous metallurgy. We acquired Chelyabinsk Metallurgical Plant in 2001.
Chelyabinsk Metallurgical Plant’s principal production lines include a BOF workshop equipped with three converters; twoan EAF workshopsworkshop equipped with EAFsEAF of 100 tonnes; four sintering machines and 125 tonnes, respectively;three blast furnaces; five concasting machines; a blooming mill for200-320 millimeter billets; five long products rolling mills for6.5-190 millimeter round bars and75-15675-200 millimeter square bars, wire rod, rebar steel, bands and other long products; a universal rail and structural rolling mill for structural shapes of different types and sizes and rail products; ahot-rolled flat products workshop equipped with a thick sheet continuous rolling mill forhot-rolled sheets of various properties of up to 1,8002,000 millimeters wide and up to 2040 millimeters thick;thick and a semi-continuous rolling mill for up to 1,500 millimeters wide and up to 6 millimeters thickhot-rolled coils; a cold-rolled productflat products workshop for0.3-4 millimeter thick cold-rolled stainless sheet. In addition, we have at our Chelyabinsk Metallurgical Plant four sintering machines and three blast furnaces. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for each of Chelyabinsk Metallurgical Plant’s principal production areas.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | |||||||||
| (In thousands of tonnes, except for percentages) | ||||||||||||
Sintering | 5,250 | 91.5 | % | — | ||||||||
Pig iron | 4,150 | 97.1 | % | — | ||||||||
Steel-making | 4,933 | 80.0 | % | — | ||||||||
Rolling | 4,802 | 74.0 | % | — | ||||||||
Production Area | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | |||||||||
| (In thousands of tonnes, except for percentages) | ||||||||||||
Sintering | 4,862 | 86.4 | % | — | ||||||||
Pig iron | 3,780 | 88.0 | % | 180 | ||||||||
Steelmaking | 4,460 | 75.7 | % | — | ||||||||
Rolling | 3,769 | 81.5 | % | — | ||||||||
Chelyabinsk Metallurgical Plant produced approximately 4.03.4 million tonnes of raw steel and 3.6approximately 3.1 million tonnes of rolled products, of which 358.5280.2 thousand tonnes were rail products in 2017.2019.
In 2008, we initiated construction of a universal rail and structural rolling mill at the Chelyabinsk Metallurgical Plant. The project is aimed at producing new types of large section structural shapes (including beams, angles, rails, channels and special sections) with total output 1.1 million tonnes per annum. Italian Danieli & C. Officine Meccaniche S.p.A. (“Danieli”) is the equipment supplier and Chinese Minmetals Engineering Co. Ltd. (“Minmetals”) is the general contractor. Investments will amount to 21.8 billion rubles.RUB 21.6 billion. In July 2013, the universal rail and structural rolling mill was launched. At present, we are developing production of both guarantee products and new products, as well as certification of products for the Russian and European markets is being carried out. ThreeFive certificates of conformity of the Customs Union and two certificatesone combined certificate of compliance with the TSI safety standards for the EU countries were obtained on certain types of rails; preparatory work for further certification of rails for the European Union is in progress.
The main target customers for the universal rolling mill products are Russian Railways, construction industry and different manufacturing companies. On November 13, 2008, Chelyabinsk Metallurgical Plant and Russian Railways signed an agreement for the supply of rails for the period until 2030. The annual supply volume is fixed at up to 400 thousand tonnes of rails. Therails annually until 2030. Under the agreement, we supply rails with annual adjustment of volumes based on production and economic factors. Additionally, we expect an increase in sales volume of the universal rolling mill products, which will occur along with the development and certification of new types of products.
In December 2010, Mechel Materials started assembling the main manufacturing equipment of the grinding-mixing complex for Portland blast-furnace slag cement production with 1.6 million tonnes capacity per annum in the territory of Chelyabinsk Metallurgical Plant. The main raw material is blast furnace slag produced by Chelyabinsk Metallurgical Plant. This complex is the first Russian facility to produce high-quality Portland blast-furnace slag cement of certain grades (CEMIII/A, CEMIII/B, CEMIII/C). Portland blast-furnace slag cement is widely used in the construction industry for the production of reinforced concrete structures. Investments amount to 5.1 billion rubles. In 2013, construction and assembly and commissioning works on the basic process equipment were completed and production in the mode of experimental-industrial testing commenced. In 2014-2017, we mastered production of Portland blast-furnace slag cement, ground granulated blast-furnace slag, Portland cement, active mineral admixture for concrete and mineral powder for stowing operations. In April 2016, Mechel Materials obtained a quality management system certificate ISO 9001:2008. In late 2016, main technological equipment was commissioned.
Izhstal
Izhstal is a special steel producer located in the western Urals city of Izhevsk, in the Republic of Udmurtia, a Russian administrative region also known as Udmurtia. Its customer base is largely comprised of companies from the aircraft, defense, engineering, metal-processing and automotive industries. We acquired Izhstal in 2004.
Izhstal’s principal production facilities include two EAFs of 25 and 40 tonnes; two ladle furnaces and a ladle vacuum oxygen decarburizer; a concasting machine; a blooming mill for100-220 millimeter billets; twomedium-sized long products rolling mills for structural shapes,30-12030-180 millimeter round bars,30-90 millimeter square bars, bands and hexagonal bars; and one continuous small sort wire mill for5.5-29 millimeter round,12-28 millimeter square and12-27 millimeter hexagonal light sections, reinforced steel and bands. The following
table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for each of Izhstal’s principal production areas.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | |||||||||
| (In thousands of tonnes, except for percentages) | ||||||||||||
Steel-making | 367 | 68.6 | % | — | ||||||||
Rolling | 667 | 65.4 | % | — | ||||||||
Wire products | 4 | 11.5 | % | — | ||||||||
Production Area | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | |||||||||
| (In thousands of tonnes, except for percentages) | ||||||||||||
Steelmaking | 340 | 66.0 | % | — | ||||||||
Rolling | 416 | 90.7 | % | — | ||||||||
Wire products | 13 | 89.6 | % | — | ||||||||
Izhstal produced 251.5approximately 224.6 thousand tonnes of raw steel, 435.9376.9 thousand tonnes of rolled products of(of which, 347.4360.4 thousand tonnes were long products,products) and approximately 0.512.0 thousand tonnes of wire products in 2017.2019.
Beloretsk Metallurgical Plant
Beloretsk Metallurgical Plant is a wire products plant in Beloretsk, in the southern part of Ural Mountains, which produces wire rod and a broad range of wire products from semi-finished products supplied by Chelyabinsk Metallurgical Plant and Izhstal. Its customers are largely from the construction, mining, engineering and other industries. We acquired Beloretsk Metallurgical Plant in 2002.
Beloretsk Metallurgical Plant’s principal production lines include a rolling workshop equipped with a wire mill for production of5.5-13.5 millimeter wire rod; a number of wire products workshops equipped with drawing, rewinding, wire stranding, cabling, grinding equipment and heat treatment furnaces, wire annealing and galvanizing, patenting and galvanizing lines; low relaxation prestressed concrete wire and rope lines; cold-worked rebar line and cold strand and section rolling mills. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for each of Beloretsk Metallurgical Plant’s principal production areas.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Rolling | 630 | 71.4 | % | — | 608 | 71.0 | % | — | ||||||||||||||||
Wire products | 600 | 73.2 | % | — | 600 | 70.5 | % | — | ||||||||||||||||
Beloretsk Metallurgical Plant produced a total of 439.4423.3 thousand tonnes of wire products in 2017.2019. Rolled products production in 20172019 amounted to a total of 449.6431.8 thousand tonnes, of which 393.4399.5 thousand tonnes were further processed into wire products and 56.232.3 thousand tonnes constituted the output volume of wire rod for third partythird-party customers.
Vyartsilya Metal Products Plant
Vyartsilya Metal Products Plant is a wire products plant in the Republic of Karelia, an administrative region in the northwest of Russia near the Finnish border that produces low carbon welding, general-purpose and structural wire, nails and steel bright and polymeric-coated chain link fences. The plant uses wire rod supplied by Chelyabinsk Metallurgical Plant and Beloretsk Metallurgical Plant. The plant’s customers are largely from the construction industry and ferrous metallurgy. We acquired Vyartsilya Metal Products Plant in 2002.
Vyartsilya Metal Products Plant’s principal production facilities include drawing machines, annealing furnaces, chain linking machines, nail-making presses and cutting machines. The following table sets forth the
capacity, the capacity utilization rate and the planned increase in capacity for Vyartsilya Metal Products Plant’s principal production area.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Wire products | 96 | 70.2 | % | — | 81 | 82.3 | % | — | ||||||||||||||||
Vyartsilya Metal Products Plant produced 67.466.7 thousand tonnes of wire products in 2017.2019.
Urals Stampings Plant
Urals Stampings Plant produces stampings and forgings from special steels and heat-resistant and titanium alloys for the aerospace, oil and gas, heavy engineering, power and other industries. Urals Stampings Plant
sources its special steel needs from Chelyabinsk Metallurgical Plant and Izhstal.Izhstal, as well as from its own production. We acquired Urals Stampings Plant in 2003.
Principal production facilities of Urals Stampings Plant and its branch in Chelyabinsk include1.5-25 tonne swages and hydraulic presses.presses, as well as steelmaking and remelting furnaces. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Urals Stampings Plant’s principal production area.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Stampings and forgings | 199 | 67.8 | % | — | 230 | 65.0 | % | — | ||||||||||||||||
Urals Stampings Plant produced 134.8149.3 thousand tonnes of special steel stampings and forgings in 2017.2019.
Mechel Nemunas
Mechel Nemunas is a Lithuanian wire products plant located in Kaunas that produces hard-drawn, annealed, electrode and concrete reinforcementcalibrated wire, nails, steel wire fiber and chain link fences. The plant uses wire rod supplied by Chelyabinsk Metallurgical Plant and Beloretsk Metallurgical Plant. Its customers are primarily from the construction industry of Europe and Baltic countries. We acquired Mechel Nemunas in 2003.
Mechel Nemunas’s principal production facilities include drawing machines, nail-making presses,and thread-rolling machines, equipment for fiber production, chain linking machines and bell furnaces. The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Mechel Nemunas’s principal production area.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Wire products | 89 | 76.0 | % | — | 82 | 32.6 | % | — | ||||||||||||||||
Mechel Nemunas produced 67.726.7 thousand tonnes of wire products in 2017.2019.
Bratsk Ferroalloy Plant
Bratsk Ferroalloy Plant is the largest enterprise in Eastern Siberia producing high-grade ferrosilicon. Ferrosilicon is used in the steel-makingsteelmaking industry as a deoxidizer for manufacturing of most steel grades, including
carbon and stainless steel grades; or as an alloying element for the production of insulating, acid-proof and heatproof steel grades; or as a pig iron modifier; andor as a reducing agent for the production of nonferrous metals and alloys. Approximately5-6 kg of ferrosilicon is used in every tonne of steel produced. We acquired Bratsk Ferroalloy Plant in 2007.
The main production facilities of the plant include threeore-thermal furnaces with a capacity of 25 megavolt-amperes (“MVA”) and oneore-thermal furnace with a capacity of 33 MVA. In October 2010, we signed contracts with Siberian Plant of Electrothermal Equipment (Sibelectrotherm JSC, Novosibirsk) for the supply of fourore-thermal furnaces with a capacity of 33 MVA each to replace the existing furnaces. We commenced commercial operations of the first new furnace in the second quarter of 2013. Currently, the second furnace assemblage is suspended.in progress. The launch of this furnace is expected in 2018.2020. Following the commissioning of the second new furnace, Bratsk Ferroalloy Plant’s production capacity is expected to increase by 15%5%.
The following table sets forth the capacity, the capacity utilization rate and the planned increase in capacity for Bratsk Ferroalloy Plant’s principal production area.
Production Area | Capacity in 2017 | Capacity Utilization Rate in 2017 | Planned Increase (2018-2020) | Capacity in 2019 | Capacity Utilization Rate in 2019 | Planned Increase (2020-2022) | ||||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||||
Ferrosilicon (65% silicon content in the alloy) | 90 | 82.4 | % | — | 84 | 79.4 | % | — | ||||||||||||||||
Bratsk Ferroalloy Plant produced 68.666.9 thousand tonnes of ferrosilicon with 65% and 75% silicon content in the alloy in 2017.2019.
Sales of steel segment products
The following table sets forth our revenues by primary steel segment product categories and our main products within these categories (including as a percentage of total steel segment revenues) for the periods indicated.
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
Product | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||||||||||
Pig Iron | 113.9 | 0.1 | % | 679.2 | 0.4 | % | 1,287.4 | 0.9 | % | |||||||||||||||
Semi-Finished Steel Products, including: | 491.9 | 0.3 | % | 3,433.5 | 2.1 | % | 5,027.2 | 3.4 | % | |||||||||||||||
Carbon andLow-Alloyed Semi-Finished Products | 326.8 | 0.2 | % | 2,730.4 | 1.7 | % | 4,139.8 | 2.8 | % | |||||||||||||||
Long Steel Products, including: | 96,768.0 | 56.0 | % | 89,575.0 | 55.5 | % | 73,853.0 | 50.6 | % | |||||||||||||||
Stainless Long Products | 2,190.6 | 1.3 | % | 2,055.2 | 1.3 | % | 1,711.9 | 1.2 | % | |||||||||||||||
Other Long Products | 48,729.7 | 28.2 | % | 39,098.9 | 24.2 | % | 28,151.8 | 19.3 | % | |||||||||||||||
Rebar | 42,734.5 | 24.7 | % | 45,204.1 | 28.0 | % | 39,980.2 | 27.4 | % | |||||||||||||||
Wire Rod | 3,113.2 | 1.8 | % | 3,216.8 | 2.0 | % | 4,009.1 | 2.7 | % | |||||||||||||||
Flat Steel Products, including: | 22,504.8 | 13.0 | % | 18,230.2 | 11.2 | % | 17,490.1 | 12.0 | % | |||||||||||||||
Stainless Flat Products | 1,198.0 | 0.7 | % | 1,507.7 | 0.9 | % | 2,564.6 | 1.8 | % | |||||||||||||||
Carbon andLow-Alloyed Flat Products | 21,306.8 | 12.3 | % | 16,722.5 | 10.3 | % | 14,925.5 | 10.2 | % | |||||||||||||||
Forgings, including: | 4,101.4 | 2.4 | % | 4,416.9 | 2.8 | % | 5,248.6 | 3.6 | % | |||||||||||||||
Stainless Forgings | 1,125.8 | 0.7 | % | 1,385.2 | 0.9 | % | 1,368.4 | 0.9 | % | |||||||||||||||
Other Forgings | 2,975.6 | 1.7 | % | 3,031.7 | 1.9 | % | 3,880.2 | 2.7 | % | |||||||||||||||
Stampings | 8,146.1 | 4.7 | % | 7,235.1 | 4.5 | % | 6,917.6 | 4.7 | % | |||||||||||||||
Wire Products, including: | 27,577.6 | 16.0 | % | 24,579.8 | 15.2 | % | 23,442.6 | 16.0 | % | |||||||||||||||
Wire | 17,498.4 | 10.1 | % | 15,530.4 | 9.6 | % | 15,560.9 | 10.7 | % | |||||||||||||||
Ropes | 3,374.4 | 2.0 | % | 3,075.7 | 1.9 | % | 2,254.9 | 1.5 | % | |||||||||||||||
Other Wire Products | 6,704.8 | 3.9 | % | 5,973.7 | 3.7 | % | 5,626.8 | 3.8 | % | |||||||||||||||
Steel Pipes | 2,733.1 | 1.6 | % | 3,286.2 | 2.0 | % | 3,308.3 | 2.3 | % | |||||||||||||||
Ferrosilicon | 2,807.1 | 1.6 | % | 3,367.5 | 2.1 | % | 3,527.7 | 2.4 | % | |||||||||||||||
Other | 7,516.0 | 4.3 | % | 6,835.3 | 4.2 | % | 5,929.4 | 4.1 | % | |||||||||||||||
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|
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|
|
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Total | 172,759.9 | 100.0 | % | 161,638.7 | 100.0 | % | 146,031.9 | 100.0 | % | |||||||||||||||
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| 2019 | 2018 | 2017 | ||||||||||||||||||||||
Product | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||||||||||
Pig Iron | 76.3 | 0.0 | % | 133.1 | 0.1 | % | 113.9 | 0.1 | % | |||||||||||||||
Semi-Finished Steel Products, including: | 137.0 | 0.1 | % | 54.4 | 0.0 | % | 491.9 | 0.3 | % | |||||||||||||||
Carbon andLow-Alloyed Semi-Finished Products | 88.6 | 0.1 | % | 8.5 | 0.0 | % | 326.8 | 0.2 | % | |||||||||||||||
Long Steel Products, including: | 97,692.2 | 55.9 | % | 105,722.0 | 56.3 | % | 96,768.0 | 56.0 | % | |||||||||||||||
Stainless Long Products | 2,703.1 | 1.6 | % | 2,698.1 | 1.4 | % | 2,190.6 | 1.3 | % | |||||||||||||||
Other Long Products | 50,045.9 | 28.6 | % | 50,871.9 | 27.1 | % | 48,729.7 | 28.2 | % | |||||||||||||||
Rebar | 42,268.0 | 24.2 | % | 48,000.2 | 25.6 | % | 42,734.5 | 24.7 | % | |||||||||||||||
Wire Rod | 2,675.2 | 1.5 | % | 4,151.8 | 2.2 | % | 3,113.2 | 1.8 | % | |||||||||||||||
Flat Steel Products, including: | 23,371.5 | 13.4 | % | 22,786.2 | 12.1 | % | 22,504.8 | 13.0 | % | |||||||||||||||
Stainless Flat Products | 4,025.0 | 2.3 | % | 1,382.3 | 0.7 | % | 1,198.0 | 0.7 | % | |||||||||||||||
Carbon andLow-Alloyed Flat Products | 19,346.5 | 11.1 | % | 21,403.9 | 11.4 | % | 21,306.8 | 12.3 | % | |||||||||||||||
Forgings, including: | 3,212.9 | 1.8 | % | 3,976.6 | 2.1 | % | 4,101.4 | 2.4 | % | |||||||||||||||
Stainless Forgings | 427.0 | 0.2 | % | 810.4 | 0.4 | % | 1,125.8 | 0.7 | % | |||||||||||||||
Other Forgings | 2,785.9 | 1.6 | % | 3,166.2 | 1.7 | % | 2,975.6 | 1.7 | % | |||||||||||||||
Stampings | 11,604.7 | 6.6 | % | 11,871.1 | 6.3 | % | 8,146.1 | 4.7 | % | |||||||||||||||
Wire Products, including: | 27,086.4 | 15.5 | % | 30,040.4 | 16.0 | % | 27,577.6 | 16.0 | % | |||||||||||||||
Wire | 17,417.8 | 10.0 | % | 19,589.8 | 10.4 | % | 17,498.4 | 10.1 | % | |||||||||||||||
Ropes | 3,532.8 | 2.0 | % | 3,916.5 | 2.1 | % | 3,374.4 | 2.0 | % | |||||||||||||||
Other Wire Products | 6,135.8 | 3.5 | % | 6,534.1 | 3.5 | % | 6,704.8 | 3.9 | % | |||||||||||||||
Steel Pipes | 3,281.4 | 1.9 | % | 3,230.2 | 1.7 | % | 2,733.1 | 1.6 | % | |||||||||||||||
Ferrosilicon | 3,228.5 | 1.8 | % | 3,927.0 | 2.1 | % | 2,807.1 | 1.6 | % | |||||||||||||||
Other | 5,159.5 | 3.0 | % | 6,176.7 | 3.3 | % | 7,516.0 | 4.3 | % | |||||||||||||||
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| |||||||||||||
Total | 174,850.4 | 100.0 | % | 187,917.7 | 100.0 | % | 172,759.9 | 100.0 | % | |||||||||||||||
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The following table sets forth percentage of sales revenue by the regions in which our steel segment products were sold for the periods indicated.
Region(1) | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
Russia | 74.4 | % | 72.3 | % | 68.1 | % | 71.0 | % | 69.7 | % | 74.4 | % | ||||||||||||
Europe | 14.4 | % | 14.8 | % | 15.9 | % | 15.7 | % | 16.9 | % | 14.4 | % | ||||||||||||
CIS | 9.8 | % | 10.4 | % | 12.4 | % | 11.1 | % | 11.5 | % | 9.8 | % | ||||||||||||
Asia | 1.1 | % | 1.2 | % | 1.3 | % | 1.9 | % | 1.6 | % | 1.1 | % | ||||||||||||
Middle East(2) | 0.1 | % | 0.5 | % | 1.1 | % | 0.1 | % | 0.1 | % | 0.1 | % | ||||||||||||
Other | 0.0 | % | 0.5 | % | 1.0 | % | 0.1 | % | 0.1 | % | 0.0 | % | ||||||||||||
United States | 0.2 | % | 0.3 | % | 0.2 | % | 0.1 | % | 0.1 | % | 0.2 | % | ||||||||||||
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Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
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| (1) | The regional breakdown of sales is based on the geographic location of our customers, and not on the location of the end users of our products, as our customers are often distributors that resell and, in some cases, further export our products. |
| (2) | Our steel segment sales to Middle East primarily go to Turkey, which accounted for |
In 2017,2019, the five largest customers of our steel products were Russian Railways (long steel products flat steel products and wire products), EVRAZ (flat(long steel products, longflat steel products, wire products and wire products)pipes), Metallservice OAO (long steel products, flat steel products and wire products), Altaivagon AO (stampings and long steel products) and Steel Industrial Company AO (long steel products, wire products, flat steel products, pipes and semi-finished products) and Mostotrest PJSC (long steel products, flat steel products, wire products and pipes), which together accounted for 13.2%10.3% of our total steel segment sales.
In 2017,2019, the five largest customers of ferrosilicon were Severstal, Mitsui & Co., Globalalloy Technologies Co. Ltd., MMK andSeverstal, ACTS Trading Corporation, Torex-Khabarovsk OOO and Scanalloys Ltd., which together accounted for 1.2%1.5% of our total steel segment sales.
The majority of our steel segment export sales are made to end users innon-sanctioned countries. The remainder of our steel products is exported to independent distributors and traders. We refer to such transactions as indirect sales. Contracts with distributors and traders generally specify certain locations to which we must deliver our products. The distributors and traders take delivery of our products at these locations, and furtheron-sell the products to other distributors or end users. Generally, when dealing with distributors and traders, we do not have information about the end users of our products. In case of indirect sales, we do not have control over the final destination of our products, contractually or otherwise.
Based on the available documentation, we are aware that certain of our products may be sold into and can bere-sold to countries that are subject to international trade restrictions or economic embargoes that prohibit and/or materially restrict certain persons (for instance, U.S. incorporated entities and U.S. citizens or residents) from engaging in commercial, financial or trade transactions with such countries, including Iran, Syria, Sudan, North Korea and Cuba (the “Sanctioned Countries”). We did not have any direct sales to the Sanctioned Countries in 2017. We estimate that approximately 1.1% of our total sales in 2017 were sold to Belarus, Serbia and Montenegro, Moldova and Bosnia and Herzegovina, of which 0.7% were direct sales to end users, however none of the sales to these jurisdictions were made to Specially Designated Nationals.2019.
We are aware of governmental initiatives in the United States and elsewhere to adopt laws, regulations or policies prohibiting or materially restricting transactions with or investment in, or requiring divestment from, entities doing business with the Sanctioned Countries. We recognize that acts prohibiting or restricting the
foregoing can sometimes be applied to our company and that dealings with the Sanctioned Countries can have an adverse effect on our business reputation.
The following table sets forth information on our domestic and export sales of our primary steel segment product categories for the periods indicated. We define exports as sales by our Russian and foreign subsidiaries to customers located outside their respective countries. We define domestic sales as sales by our Russian and foreign subsidiaries to customers located within their respective countries. See note 2625 to the consolidated financial statements.
Product | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||
Pig Iron | 113.9 | 679.2 | 1,287.4 | 76.3 | 133.1 | 113.9 | ||||||||||||||||||
Domestic Sales | 100.0 | % | 82.7 | % | 35.6 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
Export | 0.0 | % | 17.3 | % | 64.4 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||
Semi-Finished Steel Products | 491.9 | 3,433.5 | 5,027.2 | 137.0 | 54.4 | 491.9 | ||||||||||||||||||
Domestic Sales | 93.3 | % | 63.7 | % | 63.0 | % | 100.0 | % | 65.7 | % | 93.3 | % | ||||||||||||
Export | 6.7 | % | 36.3 | % | 37.0 | % | 0.0 | % | 34.3 | % | 6.7 | % | ||||||||||||
Long Steel Products | 96,768.0 | 89,575.0 | 73,853.0 | 97,692.2 | 105,722.0 | 96,768.0 | ||||||||||||||||||
Domestic Sales | 90.3 | % | 88.6 | % | 83.1 | % | 88.8 | % | 87.9 | % | 90.3 | % | ||||||||||||
Export | 9.7 | % | 11.4 | % | 16.9 | % | 11.2 | % | 12.1 | % | 9.7 | % | ||||||||||||
Flat Steel Products | 22,504.8 | 18,230.2 | 17,490.1 | 23,371.5 | 22,786.2 | 22,504.8 | ||||||||||||||||||
Domestic Sales | 89.2 | % | 88.5 | % | 88.9 | % | 86.5 | % | 84.4 | % | 89.2 | % | ||||||||||||
Export | 10.8 | % | 11.5 | % | 11.1 | % | 13.5 | % | 15.6 | % | 10.8 | % | ||||||||||||
Forgings | 4,101.4 | 4,416.9 | 5,248.6 | 3,212.9 | 3,976.6 | 4,101.4 | ||||||||||||||||||
Domestic Sales | 61.3 | % | 72.0 | % | 63.3 | % | 48.2 | % | 56.7 | % | 61.3 | % | ||||||||||||
Export | 38.7 | % | 28.0 | % | 36.7 | % | 51.8 | % | 43.3 | % | 38.7 | % | ||||||||||||
Stampings | 8,146.1 | 7,235.1 | 6,917.6 | 11,604.7 | 11,871.1 | 8,146.1 | ||||||||||||||||||
Domestic Sales | 92.1 | % | 95.4 | % | 92.2 | % | 94.7 | % | 91.1 | % | 92.1 | % | ||||||||||||
Export | 7.9 | % | 4.6 | % | 7.8 | % | 5.3 | % | 8.9 | % | 7.9 | % | ||||||||||||
Wire Products | 27,577.6 | 24,579.8 | 23,442.6 | 27,086.4 | 30,040.4 | 27,577.6 | ||||||||||||||||||
Domestic Sales | 85.5 | % | 84.0 | % | 84.4 | % | 86.6 | % | 82.5 | % | 85.5 | % | ||||||||||||
Export | 14.5 | % | 16.0 | % | 15.6 | % | 13.4 | % | 17.5 | % | 14.5 | % | ||||||||||||
Steel Pipes | 2,733.1 | 3,286.2 | 3,308.3 | 3,281.4 | 3,230.2 | 2,733.1 | ||||||||||||||||||
Domestic Sales | 93.8 | % | 90.2 | % | 90.5 | % | 93.2 | % | 93.4 | % | 93.8 | % | ||||||||||||
Export | 6.2 | % | 9.8 | % | 9.5 | % | 6.8 | % | 6.6 | % | 6.2 | % | ||||||||||||
Ferrosilicon | 2,807.1 | 3,367.5 | 3,527.7 | 3,228.5 | 3,927.0 | 2,807.1 | ||||||||||||||||||
Domestic Sales | 53.1 | % | 47.2 | % | 57.1 | % | 39.9 | % | 49.5 | % | 53.1 | % | ||||||||||||
Export | 46.9 | % | 52.8 | % | 42.9 | % | 60.1 | % | 50.5 | % | 46.9 | % | ||||||||||||
Other | 7,516.0 | 6,835.3 | 5,929.4 | 5,159.5 | 6,176.7 | 7,516.0 | ||||||||||||||||||
Domestic Sales | 83.3 | % | 81.2 | % | 86.4 | % | 98.5 | % | 86.8 | % | 83.3 | % | ||||||||||||
Export | 16.7 | % | 18.8 | % | 13.6 | % | 1.5 | % | 13.2 | % | 16.7 | % | ||||||||||||
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Total | 172,759.9 | 161,638.7 | 146,031.9 | 174,850.4 | 187,917.7 | 172,759.9 | ||||||||||||||||||
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Domestic Sales | 87.9 | % | 86.0 | % | 82.3 | % | 87.3 | % | 85.4 | % | 87.9 | % | ||||||||||||
Export | 12.1 | % | 14.0 | % | 17.7 | % | 12.7 | % | 14.6 | % | 12.1 | % | ||||||||||||
The end users of our steel products vary. Our rebar is principally used in the construction industry. The main end users of our wire rod are construction companies and wire products producers. Our other long steel products are used in various moving parts manufactured by the automotive industry, as well as the engineering, pipe, construction and railway construction industries. Our flat steel products are used in the construction (covers, floor plates) and pipe industries. Our stampings and forgings are primarily used in the engineering and pipe industries. The main end users of our wire products are the construction, mining, engineering and other industries.
The following table describes, in percentage terms, Russian domestic shipment volumes of our steel products further broken down by industry sector.
Use by Industry | Construction | Metals Trading | Ferrous Metallurgy | Engineering and Metalworking | Vehicles Manufacturing | Railways Construction and Repair | Other Industries(1) | Construction | Metals Trading | Ferrous Metallurgy | Engineering and Metalworking | Vehicles Manufacturing | Railways Construction and Repair | Other Industries(1) | ||||||||||||||||||||||||||||||||||||||||||
Semi-Finished Steel Products | 0.0 | % | 0.4 | % | 99.4 | % | 0.0 | % | 0.1 | % | 0.0 | % | 0.1 | % | 0.0 | % | 1.7 | % | 80.5 | % | 0.0 | % | 17.6 | % | 0.0 | % | 0.2 | % | ||||||||||||||||||||||||||||
Long Steel Products | 26.2 | % | 32.0 | % | 8.5 | % | 2.9 | % | 3.1 | % | 13.9 | % | 13.4 | % | 23.5 | % | 32.0 | % | 8.0 | % | 3.4 | % | 4.9 | % | 12.6 | % | 15.6 | % | ||||||||||||||||||||||||||||
Flat Steel Products | 8.9 | % | 37.5 | % | 20.3 | % | 4.1 | % | 1.4 | % | 0.1 | % | 27.7 | % | 7.2 | % | 32.4 | % | 28.3 | % | 4.8 | % | 3.1 | % | 0.0 | % | 24.2 | % | ||||||||||||||||||||||||||||
Forgings | 0.0 | % | 64.3 | % | 19.5 | % | 14.5 | % | 1.7 | % | 0.0 | % | 0.0 | % | 0.0 | % | 80.6 | % | 4.4 | % | 13.9 | % | 0.3 | % | 0.0 | % | 0.8 | % | ||||||||||||||||||||||||||||
Stampings | 0.0 | % | 8.6 | % | 0.1 | % | 7.0 | % | 84.3 | % | 0.0 | % | 0.0 | % | 0.0 | % | 13.8 | % | 0.0 | % | 7.3 | % | 78.9 | % | 0.0 | % | 0.0 | % | ||||||||||||||||||||||||||||
Wire Products | 14.0 | % | 42.2 | % | 12.9 | % | 5.6 | % | 2.9 | % | 5.2 | % | 17.2 | % | 17.4 | % | 37.6 | % | 20.5 | % | 2.7 | % | 1.8 | % | 4.2 | % | 15.8 | % | ||||||||||||||||||||||||||||
Steel Pipes | 8.6 | % | 55.1 | % | 24.5 | % | 1.8 | % | 0.4 | % | 0.0 | % | 9.6 | % | 8.7 | % | 66.1 | % | 13.0 | % | 0.5 | % | 0.2 | % | 0.0 | % | 11.5 | % | ||||||||||||||||||||||||||||
| (1) | Including mining and power industries and consumer goods sector. |
Marketing and distribution
We use flexible sales strategies that are tailored to our customers and the markets we serve. Our overall sales strategy is to develop long-term, close partnershippartnerships with the end users of our products. As part of ourend-user strategy, we research sales to distributors to identify the end user and directly market our steel products to these customers. With respect to our largest end users, we have established working committees, composed of our manufacturing engineers and customer personnel. These committees meet quarterly to monitor the performance of our products and ensure that our customers’ specifications and quality requirements are consistently met. These committees also provide customers with the opportunity to discuss their future needs with us. We attend industry conferences and advertise in industry periodicals to market our products and capabilities. Through these efforts, we have established a strong brand identity for Mechel in Russia, the CIS, Central Europe, South-East Asia and the Middle East.
We have a distribution network consisting of Mechel Service and Mechel Service Global which provide end users in Russia, the CIS and Europe with our steel products. Mechel Service and Mechel Service Global help us to develop and service our long-standing customer relationships by providing highly specialized technical sales and service to our customers.
In 2017,2019, our domestic and export sales were conducted by Mechel Service and Mechel Service Global, respectively, as well as directly by our own production facilities.
Domestic sales
Our Russian steel production facilities Chelyabinsk Metallurgical Plant, Izhstal and Urals Stampings Plant are located in large industrial areas and have long-standing relationships with local wholesale customers. Mechel Service, our steel sales and service subsidiary, has 5855 storage sites in 4541 cities throughout Russia to serve our end users, which helps us to establish long-standing customer relationships by virtue of proximity to both production and customers. In 2017,2019, Mechel Service sold 1.61.2 million tonnes of our steel products.
Ferrosilicon sales are conducted directly by our Bratsk Ferroalloy Plant. We supply ferrosilicon on the Russian market under annual contracts with monthly adjustment of prices and volumes, as well as on the spot market (under monthly tenders).
Export sales
Most of the exports in our steel segment are made to end users innon-sanctioned countries, with the rest sold to independent distributors and traders, which then resell our products to end users. Our export sales are carried out directly by our own production facilities and through Mechel Service Global’s distribution network.
Our production facilities supply high-quality rolled steel products to the subsidiaries of Mechel Service Global in Western Europe either directly, or through the logistics center in the Port of Antwerp. Our logistics center in the Port of Antwerp also allows us to sell high-quality rolled steel products to manufacturing and service companies on awalk-in basis.
In 2017,2019, ferrosilicon sales outside of Russia were principally to Japan. Deliveries to Japanese customers were made on cost insurance and freight (“CIF”) delivery terms (including transportation by rail, handling in ports of Nakhodka, Vladivostok and Vostochny and use of major container lines in major Japanese ports and insurance). We sell ferrosilicon based both on long-term contracts and on a spot basis.
Distribution
Rail transportation is used for most shipments from our production facilities and warehouses to end customers, wholesale warehouses or seaports.
Market share and competition
In our core export markets, we primarily compete with other Russian producers, as well as producers from China,the Czech Republic, Belarus, Germany, Ukraine, Turkey and Kazakhstan.China. The leading global steel manufacturers have been increasingly focused on value-added and higher-priced products. The principal competitive factors include price, distribution, product quality, product range and customer service.
In the Russian market, we compete on the basis of price and quality of steel products, their added value, product range and service, technological innovation and proximity to customers. The Russian steel industry is characterized by a relatively high concentration of production, with the six largest integrated steel producers, including ourselves, accounting for 85.2%82.5% of overall domestic crude steel output in 2017,2019, according to Metal Expert.
The following is a brief description of Russia’s five largest steel producers excluding ourselves:
| • | Novolipetsk Steel PAO(“NLMK”) is Russia’s largest steel manufacturer by volume, accounting for |
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| • | EVRAZ plc(“EVRAZ”), which includes Russian steel producers EVRAZ NTMK and EVRAZ ZSMK, is Russia’s third largest steel manufacturer by volume, accounting for 16.6% of the volume of Russian commodity steel products output in |
| • | Severstal PAO(“Severstal”) is Russia’s fourth largest steel manufacturer by volume, accounting for 16.5% of the volume of Russian commodity steel products output in 2019. The company specializes in flat products which constitute a significant part of its production. Severstal is the second-leading producer of flat products, accounting for |
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| Metalloinvest Holding Company AO(“Metalloinvest”), whose Russian assets consist of Oskol Electrometallurgical Plant AO (“OEMK”) and Ural Steel AO, had a |
Source: Companies’ websites; Metal Expert.
These six companies, including ourselves, can be divided into two groups by product type. MMK, Severstal and NLMK focus mainly on flat products, while we, EVRAZ and Metalloinvest produce primarily long products. Mechel is the fourthsecond largest and most comprehensive producer of special steel and alloys in Russia, accounting for 10.5%14.1% of total Russian special steel output by volume in 2017,2019, according to Chermet and Metal Expert. We are also the second largest producer of long steel products (excluding square billets) in Russia by volume, with significant market shares in both regular long steel products and special steel long products, according to Metal Expert.
In the Russiannon-special steel long products category, our primary products and our market position by production volume in 20172019 were as follows, according to Metal Expert:
| • | Reinforcement bars (“rebar”) — In rebar, we compete in the6-40 millimeters range. In |
| • | Wire rod— There were |
OEMK, an EAF steel mill specializing in carbon and special steel long products and our special steel competitor, is located in the southwest of Russia and serves customers in the pipe, engineering and ball-bearing industries.
According to Metal Expert and Chermet, we were one of the leading producers in Russia of special steel long products (bearing, tool,(tool, high-speed and stainless long steel) in 2017,2019, producing 9.7%7.9% of the total Russian output by volume, and we held significant shares of Russian production volumes in 20172019 of stainless long products (22.7%(21.0%), tool steel (31.3%(29.3%) and high-speed steel (28.0%(40.8%).
The following tables set forth additional information regarding our 20172019 market share in Russia for various categories of steel products.
All long products (excluding square billets)
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
EVRAZ | 4,709 | 25.5 | % | 5,189 | 26.0 | % | ||||||||||
Mechel | 3,166 | 17.2 | % | 2,650 | 13.3 | % | ||||||||||
NLMK | 2,205 | 12.0 | % | 2,494 | 12.5 | % | ||||||||||
MMK | 1,746 | 8.7 | % | |||||||||||||
Severstal | 1,804 | 9.8 | % | 1,696 | 8.5 | % | ||||||||||
MMK | 1,706 | 9.3 | % | |||||||||||||
AESW | 1,537 | 7.7 | % | |||||||||||||
Metalloinvest | 1,014 | 5.5 | % | 969 | 4.8 | % | ||||||||||
Other | 3,833 | 20.7 | % | 3,713 | 18.5 | % | ||||||||||
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Total | 18,437 | 100.0 | % | 19,994 | 100.0 | % | ||||||||||
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Source: Metal Expert.
Long products — Wire rod(1)
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
Mechel | 820 | 27.0 | % | 644 | 21.3 | % | ||||||||||
AESW | 603 | 20.0 | % | |||||||||||||
NLMK | 569 | 18.8 | % | 538 | 17.9 | % | ||||||||||
MMK | 461 | 15.2 | % | 445 | 14.7 | % | ||||||||||
Severstal | 366 | 12.1 | % | 388 | 12.9 | % | ||||||||||
EVRAZ | 318 | 10.5 | % | 350 | 11.6 | % | ||||||||||
Other | 500 | 16.4 | % | 50 | 1.6 | % | ||||||||||
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Total | 3,034 | 100.0 | % | 3,018 | 100.0 | % | ||||||||||
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Source: Metal Expert.
| (1) | Including wire rod further processed into wire and other products within the same holding company. |
Long products — Rebar
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
NLMK | 1,590 | 21.8 | % | 1,905 | 22.5 | % | ||||||||||
EVRAZ | 1,253 | 14.8 | % | |||||||||||||
Severstal | 1,074 | 12.7 | % | |||||||||||||
Mechel | 1,307 | 17.9 | % | 1,057 | 12.5 | % | ||||||||||
Severstal | 1,160 | 15.9 | % | |||||||||||||
EVRAZ | 1,051 | 14.4 | % | |||||||||||||
AESW | 934 | 11.1 | % | |||||||||||||
MMK | 399 | 5.5 | % | 388 | 4.6 | % | ||||||||||
Other | 1,801 | 24.5 | % | 1,839 | 21.8 | % | ||||||||||
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Total | 7,308 | 100.0 | % | 8,450 | 100.0 | % | ||||||||||
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Source: Metal Expert.
Flat stainless steel
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
Mechel | 16.4 | 57.8 | % | |||||||||||||
VMZ Red October | 16.2 | 66.8 | % | 9.5 | 33.4 | % | ||||||||||
Mechel | 4.2 | 17.3 | % | |||||||||||||
Other | 3.8 | 15.9 | % | 2.5 | 8.8 | % | ||||||||||
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Total | 24.2 | 100.0 | % | 28.4 | 100.0 | % | ||||||||||
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Source: Metal Expert.
Wire products
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
Severstal-Metiz | 519.2 | 20.4 | % | |||||||||||||
Mechel | 507.2 | 21.5 | % | 488.7 | 19.2 | % | ||||||||||
MMK-Metiz | 406.1 | 17.2 | % | 447.2 | 17.6 | % | ||||||||||
Severstal-Metiz | 404.9 | 17.1 | % | |||||||||||||
NLMK-Metalware | 273.4 | 11.6 | % | 276.2 | 10.9 | % | ||||||||||
EVRAZ | 201.2 | 8.5 | % | 216.9 | 8.5 | % | ||||||||||
Other | 570.3 | 24.1 | % | 596.1 | 23.4 | % | ||||||||||
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Total | 2,363.1 | 100.0 | % | 2,544.3 | 100.0 | % | ||||||||||
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Source: Metal Expert.
Wire products — High-tensile wire
Manufacturer | Production | Market Share by Production Volume | Production | Market Share by Production Volume | ||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||
Severstal-Metiz | 47.1 | 49.3 | % | |||||||||||||
Mechel | 63.1 | 68.1 | % | 28.1 | 29.5 | % | ||||||||||
Severstal-Metiz | 20.4 | 22.0 | % | |||||||||||||
MMK-Metiz | 9.2 | 9.9 | % | 20.3 | 21.2 | % | ||||||||||
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Total | 92.7 | 100.0 | % | 95.5 | 100.0 | % | ||||||||||
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Source: Metal Expert.
According to Metal Expert, Bratsk Ferroalloy Plant is the fourth largest Russian producer of ferrosilicon by volume. In 2017,2019, we had a 12.8%13.0% market share by volume of Russian ferrosilicon production.
Following is a brief description of Russia’s other largest ferrosilicon producers, according to Metal Expert and the companies’ data:
| • | Kuznetsk Ferroalloys AO(“Kuznetsk Ferroalloys”) is the largest Russian ferrosilicon producer, with a |
| • | Chelyabinsk Electrometallurgical Plant AO(“ChEMK”) is the second largest Russian ferrosilicon producer, with a |
| • | Yurginsk Ferroalloy Plant AO(“Yurginsk Ferroalloy Plant”) is the third largest Russian ferrosilicon producer, with a |
The following table sets forth additional information regarding our 20172019 ferrosilicon market share in Russia.
Manufacturer | Region | Production | Market Share by Production Volume | Region | Production | Market Share by Production Volume | ||||||||||||||||
| (In thousands of tonnes, except for percentages) | (In thousands of tonnes, except for percentages) | |||||||||||||||||||||
Kuznetsk Ferroalloys | Kemerovo | 257.8 | 47.8 | % | Kemerovo | 269.5 | 51.0 | % | ||||||||||||||
ChEMK | Chelyabinsk | 90.0 | 16.7 | % | Chelyabinsk | 84.9 | 16.1 | % | ||||||||||||||
Yurginsk Ferroalloy Plant | Kemerovo | 86.3 | 16.0 | % | Kemerovo | 78.5 | 14.8 | % | ||||||||||||||
Bratsk Ferroalloy Plant | Irkutsk | 68.7 | 12.8 | % | Irkutsk | 68.7 | 13.0 | % | ||||||||||||||
NLMK | Lipetsk | 23.4 | 4.4 | % | Lipetsk | 27.0 | 5.1 | % | ||||||||||||||
Serov Ferroalloys Plant | Sverdlovsk | 12.6 | 2.3 | % | ||||||||||||||||||
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Total | 538.8 | 100.0 | % | 528.6 | 100.0 | % | ||||||||||||||||
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Source: Metal Expert.
Raw materials
The principal raw materials we use in pig iron production are iron ore products (sinter of our own production and purchased oxidized pellets), coke and fluxing additions. Pig iron is made in blast furnaces. For sinter production, we use iron ore concentrate. Iron ore concentrate is converted into sinter at Chelyabinsk
Metallurgical Plant. In 2017,2019, our steel-makingsteelmaking operations used 6.25.0 million tonnes of iron ore feed, approximately 22%24% in the form of pellets and 68%76% in the form of sinter, and we internally sourced approximately 40%47% of our total iron ore feed requirements. In 2017,2019, Korshunov Mining Plant supplied our steel segment with 2.52.3 million tonnes of iron ore concentrate. In 2017,2019, we purchased most of the remaining part of our iron ore feed from Russian suppliers such as Kachkanarsky GOK, Kovdorsky GOK, Lebedinsky GOK Vysokogorsky GOK,and Mikhailovsky GOK and Bakalskoye Rudoupravlenie under monthly quarterly and annual contracts on market terms.
We process coking coal concentrate into coke at Mechel Coke and Moscow Coke and Gas Plant. In 2017,2019, our production facilities used 3.63.3 million tonnes of coking coal concentrate (including 2.92.6 million tonnes used by Mechel Coke and 0.7 million tonnes used by Moscow Coke and Gas Plant), and 85%84% of total usage was sourced internally. Coke is used both in pig iron production at Chelyabinsk Metallurgical Plant and in ferrosilicon production at Bratsk Ferroalloy Plant. In 2017,2019, we produced and internally used approximately 2.01.7 million tonnes of coke as well as produced for sale to third parties another approximately 0.80.9 million tonnes of coke.
Our Pugachevsky Open Pit produces limestone which, after processing into lime and flux, is used by our own steel production facilities. In 2017,2019, our limestone production amounted to 1.91.7 million tonnes.
We produce 87.8%90.3% of steel in BOFs. In steel-making,steelmaking, ferrous scrap isand waste are used in the composition of feedstock, and we are approximately 80.3%55% self-sufficient in this raw material, which amounts to 256.4354.1 thousand tonnes, of scrap, sourcing the balance from various scrap traders.
In 2017,2019, our production facilities used 31.325.3 thousand tonnes of ferrosilicon (including 25.720.2 thousand tonnes at Chelyabinsk Metallurgical Plant, 2.92.8 thousand tonnes at the Chelyabinsk branch of Urals Stampings Plant and 2.72.3 thousand tonnes at Izhstal), almost all of which was supplied by Bratsk Ferroalloy Plant.
Steel-makingSteelmaking requires significant amounts of electricity to power EAFs, ladle furnaces and rolling mills and to produce sinter. In 2017,2019, our steel segment operations consumed approximately 3.23.0 billion kWh of electricity. Chelyabinsk Metallurgical Plant, Moscow Coke and Gas Plant and Urals Stampings Plant have powerco-generation facilities, which produced 1.2produce electricity for internal consumption. Overall, our group consumed approximately 4.7 billion kWh of electricity in 2017, yielding approximately 29% self-sufficiency overall for our group, which consumed 4.3 billion kWh of electricity in 2017. The balance was purchased in the wholesale and retail electricity markets.2019. Aside from Southern Kuzbass Power Plant, which runs on steam coal and middlings, our power generating facilities work on blast furnace and coke gas, which areby-products of our steel-makingsteelmaking and coke-chemical operations, and natural gas, which we purchase from Novatek, Rosneft and Gazprom.third parties. In 2017,2019, we consumed 2.31.7 billion cubic meters of blast furnace gas, 485.1534.5 million cubic meters of coke gas and 893.3899.8 million cubic meters of natural gas. In 2017,2019, Southern Kuzbass Power Plant consumed 1.31.4 million tonnes of steam coal and middlings sourced both from our own coal mining assets and from third parties.
Large amounts of water are also required in the production of steel. Water serves as are-solvent, accelerator and washing agent. Water is used to cool equipment components, to carry away waste, to help produce and distribute heat and power and to dilute liquids. One of the principal sources of water is rivers, and many of our production facilities recirculate a portion of water used for their production needs. For example, Chelyabinsk Metallurgical Plant sources 88.1%86.9% of its water needs from recirculated water and the rest from a local river. Izhstal sources 82.0%89.5% of its water needs from recirculated water, 8.7%6.6% from recycled water and the rest from a storage reservoir. Beloretsk Metallurgical Plant sources 73.7%75.3% of its water needs from recirculated and recycled water and the rest from a storage reservoir and a local river.
Transportation costs are a significant component of our production costs and a factor in our price-competitivenessprice competitiveness in export markets. Rail transportation is our principal means of transporting raw materials from our mines to processing facilities and products to domestic customers and to ports for shipment overseas.
For a description of how seasonal factors impact our use and reserve levels of raw materials, see “Item 5. Operating and Financial Review and Prospects — Seasonality.”
Trade restrictions
Trade restrictions inIn July 2018, the formEuropean Union introduced a system of tariffsimport quotas, according to which the import of steel to the European Union until July 2021 is limited to specific volumes established for 26 categories of steel products. For each category of steel products, the import quota is calculated on the basis of the average volume of all imports of these products to the European Union over the past three years. If the quota is exceeded, a duty of 25% will be charged. Each product category consists of several types of products. Quotas apply to all suppliers of steel to the European Union, and dutiesfor certain product categories, quotas are widespread inset for different countries. Our steel products supplied to the steel industry. However, weEuropean Union are less exposed than most other Russian steel producerssubject to these trade restrictions as restrictions on Russian exports have mainly been directed against flatquotas. During the period from July 1, 2019 to June 30, 2020, the quota for the product category that includes beams produced by Chelyabinsk Metallurgical Plant for Russia amounts to 24.2 thousand tonnes, and the quota for the product category that includes rolled products whereas most of our exports consist of long products. In addition, the abolitionproduced by the Russian government of steel export duties in 2002 has also effectively improved exports of Russian steel. In the future the Russian government may restore export duties on steel products and may also impose export duties on some raw materials, such as coal and iron ore concentrate.Izhstal for Russia amounts to 243.8 thousand tonnes.
In February 2008, an antidumping duty in the amount of 17.8% was imposed on exports to the European Union of ferrosilicon produced by our subsidiary Bratsk Ferroalloy Plant for a period of five years. In February 2013, the European Commission initiated an expiry review of the antidumping measures applicable to imports of ferrosilicon. In April 2014, the antidumping duty was extended for another five years. On April 2, 2019, the European Commission has issued a notice to initiate the expiry review of the antidumping measures applicable to imports of ferrosilicon originating from Russia and the People’s Republic of China. During the review period by the European Commission, the antidumping duty continues to apply.
Quartzite Production
We hold the subsoil license for the Uvatskoye deposit of quartzite and quartzite sandstones, a raw material used for ferrosilicon production. The deposit is accessible by unpaved road and located 20 kilometers southwest of Nizhneudinsk in the Irkutsk region. In 2011, we conducted successful technological tests of an experimental
batch of quartzite for smelting of ferrosilicon. We completed the exploration of the alluvial part of the southern area of the Uvatskoye deposit and applied to the Department for Subsoil Use for the Irkutsk region (“Irkutsknedra”) with a plan for the pilot commercial development of the alluvial part of the southern area. Irkutsknedra agreed to the plan and recommended further geologic exploration within the entire license area of the Uvatskoye deposit. In 2012, drilling and sampling activities were conducted. Since 2013, we have been carrying out the pilot commercial development of the alluvial part of the southern area of the Uvatskoye deposit, with a view to develop the processing methods and technical and economic parameters of the deposit. In 2017, laboratory studies of selected cores of the bedrock of the deposit were completed. At present, feasibility studyIn 2018-2019, temporary exploration conditions of the southern area of the Uvatskoye deposit conditions is being worked out.were approved with the subsequent development of a pilot batch of quartzites to clarify the technological parameters of production and obtain permanent exploration conditions. In light of the above, we are not able to state the amount of proved reserves for the Uvatskoye quartzite deposit.
The table below sets forth certain information regarding the subsoil license for our quartzite and quartzite sandstones deposit.
License Area | License Holder | License Expiry Date | Status(1) | Area (sq. km) | Year Production Commenced | Surface Land Use Rights | ||||||||||||||
Uvatskoye | Bratsk Ferroalloy Plant | July 2033 | Exploration and development | 18.21 | n/a | Lease | ||||||||||||||
| (1) | “Exploration and development” refers to sites where preliminary work and drilling for calculation of mineral reserves are being carried out. |
Power Segment
Our power segment generates and supplies electricity, heat energy and other power resources to our group companies and to external consumers. It enables us to market high value-added productselectricity and heat energy made from our steam
coal, such as electricity and heat energy, and to increasemaintain the electric power self-sufficiency of theour mining and steel segments of our business.segments. Our power segment consists of a power generating plant Southern Kuzbass Power Plant and a power distribution company Kuzbass Power Sales Company.
The following table sets out total volumes of electricity production by our group.
| 2017 | 2016 | 2015 | ||||||||||
| (In million kWh) | ||||||||||||
Electricity | 3,427.4 | 3,378.2 | 4,137.4 | |||||||||
| 2019 | 2018 | 2017 | ||||||||||
| (In million kWh) | ||||||||||||
Electricity | 3,395.3 | 3,250.6 | 3,427.4 | |||||||||
Southern Kuzbass Power Plant
Southern Kuzbass Power Plant is located in Kaltan in the Kemerovo region, which is in the southern part of Russia’s coal-rich Kuzbass district. It has a total installed capacity of 554 MW and installed heat capacity of 506 Gcal/h. In 2017,2019, the plant generated 1,845.71,884.4 million kWh of electricity and 670.1687.3 thousand Gcal of heat energy. We acquired Southern Kuzbass Power Plant in 2007.
Southern Kuzbass Power Plant uses steam coal and middlings as fuel, which isare supplied to it mostly from local sources, including our Southern Kuzbass Coal Company. In 2017,2019, it consumed 624.5578.7 thousand tonnes of steam coal and middlings sourced from Southern Kuzbass Coal Company, Elgaugol and Elgaugol.Yakutugol.
The generation facilities of Southern Kuzbass Power Plant are listed below:
Generation Unit No. | Year of Manufacture | Month and Year of Commissioning at Southern Kuzbass Power Plant | Installed Capacity (MW) | Electricity Production in 2017 (million kWh) | Year of Manufacture | Month and Year of Commissioning at Southern Kuzbass Power Plant | Installed Capacity (MW) | Electricity Production in 2019 (million kWh) | ||||||||||||||||||||||||
VK-50-2 LMZ | 1950 | April 1951 | 53 | 61.1 | 1950 | April 1951 | 53 | 88.6 | ||||||||||||||||||||||||
VK-50-2 LMZ | 1950 | November 1951 | 53 | 0 | 1950 | November 1951 | 53 | 44.4 | ||||||||||||||||||||||||
VK-50-2 LMZ | 1950 | August 1952 | 53 | 161.2 | 1950 | August 1952 | 53 | 270.1 | ||||||||||||||||||||||||
VK-50-2 LMZ | 1952 | February 1953 | 53 | 158.1 | 1952 | February 1953 | 53 | 290.2 | ||||||||||||||||||||||||
T-115-8,8 LMZ | 1996 | December 2003 | 113 | 470.2 | 1996 | December 2003 | 113 | 410.5 | ||||||||||||||||||||||||
T-88/106-90 LMZ | 1953 | July 1954 | 88 | 297.9 | 1953 | July 1954 | 88 | 473.3 | ||||||||||||||||||||||||
VK-50-2 LMZ | 1954 | December 1954 | 53 | 157.9 | 1954 | December 1954 | 53 | 63.5 | ||||||||||||||||||||||||
T-88/106-90 LMZ | 1953 | September 1956 | 88 | 539.3 | 1953 | September 1956 | 88 | 243.8 | ||||||||||||||||||||||||
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Total | 554 | 1,845.7 | 554 | 1,884.4 | ||||||||||||||||||||||||||||
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The plant sells electricity and capacity on the wholesale market only, as well as heat energy directly to consumers. In Russia, it is common for thermal power plants to produce and sell heat energy, sometimes in the form of industrial steam and sometimes in the form of hot water, for business and residential heating and household use, which is distributed in towns and cities by a network of hot water distribution pipes. Southern Kuzbass Power Plant’s heat energy is distributed at regulated prices in the form of hot water in the cities of Kaltan, Osinniki and Mezhdurechensk.
Kuzbass Power Sales Company
Kuzbass Power Sales Company is the largest power distribution company in the Kemerovo region. Its marketed power volume in 20172019 amounted to approximately 9.410.1 billion kWh. We acquired Kuzbass Power Sales Company in 2007. The addition of Kuzbass Power Sales Company, along with Southern Kuzbass Power Plant, allows us to increase revenues in our power segment.
Kuzbass Power Sales Company sells electricity on the retail and wholesale markets. The company sells electricity to households, social infrastructure companies, housing and public utilities and large industrial companies. Due to its area of operation, its primary industrial consumers are in the mining and processing industries. It supplies electricity to end consumers directly and also through one regional agent.
The company is included in the Register of Guaranteeing Suppliers of the Kemerovo region. For a discussion of guaranteeing suppliers, see “— Regulatory Matters — Regulation of Russian Electricity Market — Sales of electricity — Retail electricity market.”
Mechel Energo
Mechel Energo’s core activity is the supply of electricity, heat energy in the form of hot water and steam, compressed air, oxygen, nitrogen, liquid nitrogen and liquid oxygen. In addition, it coordinates the supply of energy to our production facilities. The company has a separate business unit in Izhevsk, as well as branches in Chelyabinsk (including production department in Chebarkul), Beloretsk and Vidnoye. Mechel Energo also performs the functions of the sole executive body of its subsidiary Southern Kuzbass Power Plant.
Mechel Energo supplies heat energy (in the form of hot water and steam) at regulated prices to its consumers, including residential consumers and commercial customers, in the cities of Vidnoye, Chelyabinsk, Chebarkul, Beloretsk and Izhevsk.
Mechel Energo has facilities for the production of power resources and operates using mainly blast furnace and coke gas, which areby-products of our steel-making and coke-chemical operations, and natural gas, which we purchase from Novatek, Rosneft and Gazprom.
Mechel Energo’s sales amounted to approximately 3.33.6 billion kWh of electricity purchased in the wholesale and retail electricity markets and 3.83.7 million Gcal of heat energy in 2017.2019.
Capital Investment Program
We continually review our capital investment program in light of our cash flow, liquidity position, results of operations and market conditions. In light of the above factors, we may adjust our capital investment program. Our planned capital expenditures for 2018 are increased by approximately 107% as compared to 2017. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — We will require a significant amount of cash to fund our capital investment program.” For further information on funding of capital investments, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources.”
Our capital investment program includes capital spending of up to 33.4RUB 28.0 billion rubles for 2018-2020.2020-2022. Our capital investment program is primarily targeted at expanding the mining segment and increasing the efficiency of the steel segment, and includes, among others,including,inter alia, investments of approximately 24.4RUB 15.6 billion rubles in mining and approximately 5.9RUB 9.1 billion rubles in steel. However, our ability to fully realize our capital investment program is constrained by our ability to generate cash flow, obtain additional financing and refinance or restructure existing indebtedness. We may be limited in our ability to obtain financing on a project finance basis which may impose further restrictions on the operations of the project or require the economic returns of the project to be shared with investors or lenders.
In the mining segment, we expect to directinvest approximately 6.7RUB 2.6 billion rublesin 2020-2022 for the developmentreconstruction of V.I. Lenina Underground with the Elgainvolvement of Granichny and Olzherassk subsoil plots in the mining of coal deposit in 2018-2020. We will invest approximately 0.7 billion rubles in 2018-2020 for increasing coal production at Sibirginskaya Underground which is part of Southern Kuzbass Coal Company.reserves.
The steel segment projects are mainly targeted at expandingmodernization of production facilities in order to improve their efficiency. Major projects include the sharereconstruction of high value-added products which we produce, while maintaining existing output, and are mainly focused onoxygen-converter production at Chelyabinsk Metallurgical Plant. The main project, initiatedPlant, which comprises modernization of three converters (two converters were modernized in 2008, is2009-2016), and the constructionmodernization of a universal rail and structural rolling millsteel-wire-rope production with a capacityinstallation of 1.1 million tonnes, which allows us to reduce the proportion of lower-value semi-finished products sales by increasing the production of high-quality rolled steel products and rails. The universal rail and structural rolling mill was launched in July 2013.new drawing equipment at Beloretsk Metallurgical Plant.
The table below sets forth the major items of our capital expenditures by segment and facility for 2018-20202020-2022 (including cumulatively the expenditures made since the launch of the relevant project):
Planned Increase in Capacity and/or Other Improvement | Approximate Total Planned Expenditures(1) | Year of Project Launch | Estimated Year of Completion | Planned Increase in Capacity and/or Other Improvement | Approximate Total Planned Expenditures(1) | Year of Project Launch | Estimated Year of Completion | |||||||||||||||||||||
| (In millions of Russian rubles) | (In millions of Russian rubles) | |||||||||||||||||||||||||||
Mining Segment | ||||||||||||||||||||||||||||
Maintenance expenditures | Maintaining current coal and iron ore mining and coal and iron ore concentrate production | 14,556 | 2018 | 2020 | Maintaining current coal and iron ore mining and coal and iron ore concentrate production | 12,363 | 2020 | 2022 | ||||||||||||||||||||
Elgaugol | ||||||||||||||||||||||||||||
Construction of the Elga coal complex facilities | Development of the coal deposit with increase of production capacity to 11.7 million tonnes per annum | 17,678 | 2009 | 2020 | ||||||||||||||||||||||||
Elga-road | ||||||||||||||||||||||||||||
Elga-road(2) | ||||||||||||||||||||||||||||
Construction of the rail line to the Elga deposit | Providing access to the coal deposit | 66,102 | 2009 | 2020 | Providing access to the coal deposit | 65,264 | 2009 | 2022 | ||||||||||||||||||||
Southern Kuzbass Coal Company | ||||||||||||||||||||||||||||
Increase of coal production at Sibirginskaya Underground | Increase of production output to 2.4 million tonnes per annum | 5,010 | 2009 | 2020 | ||||||||||||||||||||||||
Reconstruction of V.I. Lenina Underground | Increase in average annual production up to 1.0 million tonnes | 2,707 | 2019 | 2022 | ||||||||||||||||||||||||
Steel Segment | ||||||||||||||||||||||||||||
Maintenance expenditures | Maintaining current output capacity | 1,732 | 2018 | 2020 | Maintaining current output capacity | 3,820 | 2020 | 2022 | ||||||||||||||||||||
Chelyabinsk Metallurgical Plant | ||||||||||||||||||||||||||||
Construction of rolling facilities in blooming building | Introducing new types of rolled products for construction industry with a design capacity of 1.1 million tonnes per annum | 21,761 | 2009 | 2018 | ||||||||||||||||||||||||
Reconstruction of oxygen-converter production | Increase of cast weight to 152 tonnes | 4,845 | 2009 | 2020 | Increase of cast weight to 152 tonnes | 6,037 | 2009 | 2022 | ||||||||||||||||||||
Beloretsk Metallurgical Plant | ||||||||||||||||||||||||||||
Modernization of steel-wire-rope production | Installation of new drawing equipment | 1,069 | 2016 | 2022 | ||||||||||||||||||||||||
Power segment | ||||||||||||||||||||||||||||
Maintenance expenditures | Maintaining current output capacity | 1,069 | 2018 | 2020 | Maintaining current output capacity | 1,416 | 2020 | 2022 | ||||||||||||||||||||
Transport division | ||||||||||||||||||||||||||||
Maintenance expenditures | Maintaining current output capacity | 1,303 | 2018 | 2020 | Maintaining current output capacity | 475 | 2020 | 2022 | ||||||||||||||||||||
Port Posiet | ||||||||||||||||||||||||||||
Technical modernization of Port Posiet | Increase of cargo-handling capacity to 9.0 million tonnes per annum | 4,345 | 2009 | 2019 | Increase of cargo-handling capacity to 9.0 million tonnes per annum | 4,652 | 2009 | 2022 | ||||||||||||||||||||
| (1) | We estimate that approximately |
| (2) | We are currently negotiating a potential sale of the Elga coal complex, for further details see “Item 4. Information on the Company — Business Strategy.” |
Research and Development
We maintain research programs at the corporate level and at certain of our business units to carry out research and applied technology development activities. At the corporate level, we have a Department of Technology Development at Mechel-Steel Management (two(six employees) and a Production and Technical Department at Mechel Mining Management (12(11 employees). In December 2008, we established Mechel Engineering with a headcount of 214 employees(207 employees) to carry out design and engineering works to increase the efficiency of our mining business. The head office of Mechel Engineering is located in Novosibirsk. Geological services provided by
services provided by Mechel Engineering include: (1) geological survey work related to prospecting and developing minerals and coal deposits; (2) hydrogeological survey work; (3) monitoring of geological environment; (4) preparation of geological materials for feasibility studies and preparation of geological reports with reserves estimation; (5) test drilling (methane drainage borehole);drilling; and (6) computer simulation of coal and ore deposits.
In the course of our research and development, we also contract with third partythird-party consultants and Russian research institutions.
In addition to these activities performed at our corporate level, each of Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant and Urals Stampings Plant have specialized research divisions with a total of 130126 employees involved in the improvement of existing technologies and products.
Our research and development expenses in the years ended December 31, 2017, 20162019, 2018 and 20152017 were not significant.
Insurance
Most of our Russian production facilities have no comprehensive insurance coverage against the risks associated with the business in which we operate, other than insurance required under Russian law, existing collective bargaining agreements, loan agreements or other undertakings. Our Russian facilities have a number of compulsory insurance policies: liability of the owner of a hazardous facility for injury in an accident at a hazardous facility, third-party liability motor vehicle insurance and other forms of insurance. Some of our facilities provide their workers with medical insurance and accident and health insurance in accordance with existing collective bargaining agreements. In addition, most of our Russian facilities have voluntary motor vehicle insurance, and some of our facilities have cargo insurance, property insurance (real property and machinery) and certain types of third-party liability insurance.
Some of our international production facilities are not covered by comprehensive insurance typical for such operations in Western countries. However, they all have the compulsory insurance coverage required under the law of their respective jurisdictions: motor vehicle liability insurance, pollution liability insurance, employer liability, etc. Furthermore, some of our international facilities carry insurance coverage for their property (real property and machinery, inventory, motor vehicle), liability (third-party liability, professional and product liability), cargo (including freight insurance), accounts receivable, financial losses related to the abuse of the employees, as well as medical insurance, litigation insurance and accident insurance for their workers.
Environmental Protection
Similar to other companies operating in the industries in which we operate, our activities may have an adverse impact on the environment due to emission of coal and coke dust and other pollutants and hazardous materials into the atmosphere, discharge of polluted waste water into the environment and generation of waste and hazardous materials that need to be disposed of or reused without serious damage to the environment.
Our environmental policy has the following key components:
implement formal environmental management systems that are aligned with applicable international standards;
identify, assess, monitor, control and manage significant environmental risks;
establish clear and meaningful environmental objectives and targets aimed at continuous improvement;
implement, maintain and regularly test emergency response plans;
identify potential environmental emergencies; and
We have been developing and implementing environmental programs at all of our mining, steel and power subsidiaries. Such programs include measures to enforce our adherence to the requirements and limits imposed on air and water pollution, as well as disposal of industrial waste, introduction of environmentally friendly industrial technologies, the construction of purification and filtering facilities, the repair and reconstruction of industrial water supply systems, the installation of metering systems, reforestation and the recycling of water and industrial waste.
Some of our subsidiaries have entered into environment protection agreements with the Ministry of Natural Resources and Ecology of the Russian Federation and other authorities and metallurgical sites. Under these agreements, Chelyabinsk Metallurgical Plant and Bratsk Ferroalloy Plant are obliged to reduce the level of pollutants emission into the atmosphere by 20% by 2024.
Regulatory Matters
Licensing of Operations in Russia
We are required to obtain numerous licenses, authorizations and permits from the Russian governmental authorities for our operations. Some of our companies need to obtain licenses, authorizations and permits to carry out their activities, including, among other things, for:
the use of subsoil, which is described in more detail in “— Subsoil Licensing in Russia” below;
the use of water resources;
the emission and discharge of pollutants into the environment;
the handling of waste of aI-IV hazard class;
the handling of industrial explosives;
operation of explosive and fire and chemically hazardous production facilities of aI-III hazard class;
fire control and security;
medical operations;
mine surveying;
loading and unloading operations;
transportation activities;
collection, processing, storage and sale of ferrous andnon-ferrous scrap;
works with information classified as state secret;
manufacturing of equipment for nuclear facility; and
operation of radiation source.
The Federal Law “On Licensing of Certain Types of Activities,” dated May 4, 2011, as amended (the “Licensing Law”), as well as other laws and regulations, sets forth the activities subject to licensing and establish procedures for issuing licenses.
Under the Licensing Law, generally, licenses may be issued for an indefinite term. Some licenses, in particular, licenses for the use of natural resources may be issued for various periods. Upon the expiration of a license, it may be extended upon application by the licensee, provided the licensee is not in violation of the terms and conditions of the license and the relevant regulations.
In accordance with amendments to the Federal Law “On the Electric Power Industry”No. 35-FZ dated March 26, 2003, as amended (the “Electric Power Industry Law”) and other legislative acts which entered into
force on December 29, 2017,25, 2018, power sales activity related to the sale of electricity in the retail electricity market is
subject to compulsory licensing since December 30, 2018.July 1, 2020. The Electric Power Industry Law does not provide for licensing procedures, instead the Russian government shall enact an order setting out procedures for obtainment of an electric power sales activity license, which is outstanding as of the date hereof. We aim to file for a license once the procedures are enacted.
Regulatory authorities maintain considerable discretion in the timing of issuing licenses and permits. The requirements imposed by these authorities may be costly, time-consuming and may result in delays in the commencement or continuation of exploration or extraction operations. Further, private individuals and the public at large possess rights to comment on and otherwise participate in the licensing process, including through challenges in the courts. For example, individuals and public organizations may make claims or applications to Rosnedra and Rosprirodnadzor regarding subsoil abuse, damage to the subsoil and general environmental issues. Rosnedra isand Rosprirodnadzor are required by law to review such claims and applications and to respond to those who file them. The agency can initiate further investigation in the course of reviewing claims and applications, and such investigations can lead to suspension of the subsoil license if the legal grounds for such suspension are identified in the course of the investigation. In addition, citizens may make claims in court against state authorities for failing to enforce environmental requirements (for example, if a breach by the licensee of its license terms caused damage to an individual’s health, legal interests or rights), and pursuant to such a claim the court may order state authorities to suspend the subsoil license. Accordingly, the licenses we need may not be issued, or if issued, may not be issued in a timely fashion, or may impose requirements which restrict our ability to conduct our operations or to do so profitably.
As part of their obligations under licensing regulations and the terms of our licenses and permits, some of our companies must comply with numerous industrial standards, employ qualified personnel, maintain certain equipment and a system of quality controls, monitor operations, maintain and make appropriate filings and, upon request, submit specified information to the licensing authorities that control and inspect their activities.
Subsoil Licensing in Russia
In Russia, mining minerals requires a subsoil license from Rosnedra with respect to an identified mineral deposit. In addition to a subsoil license, a subsoil user needs to obtain rights (through ownership, lease or other right) to use a land plot covering the surface of the area where such licensed mineral deposit is located. In addition, as discussed above, operating permits are required with respect to specific mining activities.
The primary law regulating subsoil licensing is the Federal Law “On Subsoil,” dated February 21, 1992, as amended (the “Subsoil Law”), which sets out the regime for granting licenses for the exploration and extraction of mineral resources. The Procedure for Subsoil Use Licensing, adopted by Resolution of the Supreme Soviet of the Russian Federation on July 15, 1992, as amended (the “Licensing Regulation”), also regulates the licensing of exploration and extraction of mineral resources. According to both the Subsoil Law and the Licensing Regulation, subsurface mineral resources are generally subject to the jurisdiction of the federal authorities.
Among different licenses required for mining minerals in Russia, the two major types of licenses are: (1) an exploration license, which is anon-exclusive license granting the right of geological exploration and assessment within the license area, and (2) an extraction license, which grants the licensee an exclusive right to produce minerals from the license area. In practice, many of the licenses are issued as combined licenses, which grant the right to explore and produce minerals from the license area. A subsoil license defines the license area in terms of latitude, longitude and depth. The subsoil user has the right to develop and use, including sell, mineral resources extracted from the license area for a specified period. The Russian Federation, however, retains ultimate state ownership of all subsoil mineral resources.
There are three major types of payments with respect to the extraction of minerals: (1) alump-sum payment for granting the right to use subsoil; (2) periodic payments for the use of subsoil under the Subsoil Law; and
(3) the mineral extraction tax under the Russian Tax Code. Failure to make these payments could result in refusal
to grant the right to use subsoil or the suspension or termination of the subsoil license. The SubsoilLaw-mandated payments are not material to our mining segment’s results of operations. For coal, the basic rate of the mineral extraction tax ranges from RUB 11 to RUB 57 rubles per tonne depending on the type of coal. At the same time, the actual rate of tax in respect of extracted coal is subject to indexation on a quarterly basis taking into account deflator coefficients adopted by the Ministry of Economic Development of the Russian Federation. For iron ore, the mineral extraction tax is 4.8%. In 2017,2019, mineral extraction taxes amounted to 1,283RUB 1,287 million, rubles, which are included in the consolidated statement of profit (loss) and other comprehensive income (loss) as extraction related overheads.
Currently, extraction licenses and combined licenses are awarded, generally, by tender or auction conducted by special auction commissions of Rosnedra. While such tender or auction may involve a representative of the relevant region, the separate consent of regional authorities is generally not required in order to issue subsoil licenses. The winning bidder in a tender is selected on the basis of the submission of the most technically competent, financially attractive and environmentally sound proposal that meets published tender terms and conditions. At an auction, the success of a bid is determined by the attractiveness of the financial proposal. In limited circumstances, extraction licenses may also be issued without holding an auction or tender, for instance to holders of exploration licenses who discover mineral resource deposits through exploration work conducted at their own expense. Regional authorities may issue extraction licenses for “common” mineral resources, such as clay, sand or limestone.
Pursuant to the Subsoil Law, a subsoil plot is provided to a subsoil user as a “mining allotment,” i.e. a geometric block of subsoil. Preliminary mining allotment boundaries are determined at the time the license is issued. Following the development and approval of a technical plan in accordance with established procedure, documents defining the adjusted mining allotment boundaries are incorporated as an integral part into the license. Pursuant to Resolution No. 118 of the Government of the Russian Federation dated March 3, 2010, as amended, a special commission comprised of representatives from the Ministry of Natural Resources and Ecology, Rosnedra, Rosprirodnadzor, Rostekhnadzor and relevant local authorities approve development plans and other project documentation relating to the use of subsoil plots.
The term of the license is set forth in the license. Under the Subsoil Law, exploration licenses are generally issued for a term of up to five years and up to 10 years for geological surveys of internal sea waters, territorial sea waters or the continental shelf of the Russian Federation. In accordance with amendments to the Subsoil Law that entered into force in January 2014, exploration licenses with respect to subsoil plots partially or fully located in certain constituent entities of the Russian Federation can be issued for a term of up to seven years. Extraction licenses are issued for the term of the expected operational life of the field based on a feasibility study that provides for rational use and protection of the subsoil. In the event that a prior license with respect to a particular field is terminated early (for example, when a license is withdrawn due tonon-usage of the licensed subsoil), an extraction license may have a one year term until a new licensee is determined, but is generally granted to another user for the term of the expected operational life of the field based on a feasibility study. Licensees are also allowed to apply for extensions of such licenses for the purposes of completing the exploration and development of the field, or remediation activities in the absence of violations of the terms and conditions of the license. The term of a subsoil license runs from the date the license is registered with Rosnedra.
Issuance of licenses
Subsoil licenses are issued by Rosnedra. Most of the currently existing extraction licenses owned by companies derive from:(1) pre-existing rights granted during the Soviet era and up to the enactment of the Subsoil Law to state-owned enterprises that were subsequently reorganized in the course of post-Soviet privatizations; or (2) tender or auction procedures held in the post-Soviet period. The Civil Code, the Subsoil Law and the Licensing Regulation contain the major requirements relating to tenders and auctions. The Subsoil Law allows extraction licenses to be issued without a tender or auction procedure only in limited circumstances,
such as instances when a mineral deposit is discovered by the holder of an exploration license at its own expense during the exploration phase.
Extension of licenses
The Subsoil Law permits a subsoil licensee to request an extension of an extraction license for the term of the expected operational life of the subsoil plot in order to complete the extraction from the subsoil plot covered by the license or the procedures necessary to vacate the land once the use of the subsoil is complete, provided the user is not in violation of the terms and conditions of the license and the relevant regulations.
In order to extend the period of a subsoil license, a company must file an application with territorial authorities of Rosnedra to amend the license. In addition, as we have seen in practice, a subsoil licensee may be required to prepare and provide to the authority amended technical documentation and development plan of the deposit under the license justifying the requested extension. The costs associated with the license extension are generally not substantial and mainly relate to preparing amendments to the technical documentation and development plan of the subsoil plot. Application to extend the period of subsoil license is typically made six months before its expiration.
To the best of our knowledge, derived from publicly available information, the relevant governmental authorities when determining whether to approve an amendment (including an extension) of a license consider the following: (1) the grounds for the amendments, with specific information as to how the amendments may impact payments by the licensee to the federal and local budgets; (2) compliance of the licensee with the conditions of the license; and (3) the technical expertise and financial capabilities that would be required to implement the conditions of the amended license. We have successfully extended certain of our subsoil licenses which were due to expire for the entire term of the expected operational life of the subsoil plots. The terms of the licenses were extended in accordance with the amendments we made to the development plans of the subsoil plots. Furthermore, as evidenced by a number of court cases during the past several years, license extensions are being rejected predominantly on the grounds of subsoil users being in violation of the material terms of the licenses. Though current regulation does not specify what license terms are material, current practice suggest that regulatory authorities tend to treat as material terms of the license the terms related to license payments, production levels and operational milestones.
The factors that may, in practice, affect a company’s ability to obtain the approval of license amendments (including extensions) include: (1) its compliance with the license terms and conditions; (2) its management’s experience and expertise relating to subsoil issues; and (3) the relationship of its management with federal and/or local governmental authorities, as well as local governments. For a description of additional factors that may affect Russian companies’ ability to extend their licenses, see “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — Our business could be adversely affected if we fail to obtain or extend necessary subsoil licenses and permits or fail to comply with the terms of our subsoil licenses and permits.” See also “Item 3. Key Information — Risk Factors — Risks Relating to the Russian Federation — Legal risks and uncertainties — Deficiencies in the legal framework relating to subsoil licensing subject our licenses to the risk of governmental challenges and, if our licenses are suspended or terminated, we may be unable to realize our reserves, which could materially adversely affect our business, financial condition, results of operations and prospects” and “Item 3. Key Information — Risk Factors — Risks Relating to the Russian Federation — Legal risks and uncertainties — Weaknesses relating to the Russian legal system and legislation create an uncertain investment climate.”
Transfer of licenses
Licenses may be transferred only under certain limited circumstances that are set forth in the Subsoil Law, including the reorganization or merger of the licensee or in the event that an initial licensee transfers its license to a newly established legal entity in which it has at least a 50% ownership interest, provided that the transferee possesses the equipment and authorizations necessary to conduct the exploration or extraction activity covered by the transferred license.
Maintenance and termination of licenses
A license granted under the Subsoil Law is accompanied by a licensing agreement. The law provides that there will be two parties to any subsoil licensing agreement: the relevant state authorities and the licensee. The licensing agreement sets out the terms and conditions for the use of the subsoil.
Under a licensing agreement, the licensee makes certain environmental, safety and extraction commitments. For example, the licensee makes an extraction commitment to bring the field into extraction by a certain date and to extract an agreed-upon volume of natural resources each year. The licensing agreement may also contain commitments with respect to the social and economic development of the region. When the license expires, the licensee must return the land to a condition which is adequate for future use. Although most of the conditions set out in a license are based on mandatory rules contained in Russian law, certain provisions in a licensing agreement are left to the discretion of the licensing authorities and are often negotiated between the parties. However, commitments relating to safety and the environment are generally not negotiated.
The fulfillment of license’s conditions is a major factor in the good standing of the license. If the subsoil licensee fails to fulfill the license’s conditions, upon notice, the license may be terminated or the subsoil user’s rights may be restricted by the licensing authorities. However, if a subsoil licensee cannot meet certain deadlines or achieve certain volumes of exploration work or extraction output as set forth in a license, it may apply to amend the relevant license conditions, though such amendments may be denied.
The Subsoil Law and other Russian legislation contain extensive provisions for license termination. A licensee can be fined or the license can be suspended or terminated for repeated breaches of the law, upon the occurrence of a direct threat to the lives or health of people working or residing in the local area, or upon the occurrence of certain emergency situations. A license may also be terminated for violations of “material” license terms. Although the Subsoil Law does not specify which terms are material, failure to pay subsoil taxes and failure to commence operations in a timely manner have been common grounds for limitation or termination of licenses. Consistent underproduction and failure to meet obligations to finance a project would also be likely to constitute violations of material license terms. In addition, certain licenses provide that the violation by a subsoil licensee of any of its obligations may constitute grounds for terminating the license.
Rosprirodnadzor routinely conducts scheduled and unscheduled inspections for compliance by subsoil users with the terms of their licenses and reports violations to Rosnedra. Rosnedra examines Rosprirodnadzor’s reports and, if it finds that these violations constitute sufficient grounds for terminating the license, the Commission for Termination of Subsoil Licenses considers the nature of these violations and recommends that Rosnedra either (i) revoke the license; (ii) notify the subsoil user about the identified violations and potential termination of the license if the subsoil user fails to rectify the identified violations within a prescribed period of time; or (iii) consider that the actions described in (i) and (ii) above are unreasonable and accept the information provided by the subsoil user.
If the licensee does not agree with a decision of the licensing authorities, including a decision relating to the termination of a license or the refusal to change an existing license, the licensee may appeal the decision through administrative or judicial proceedings. In certain cases prior to termination, the licensee has the right to attempt to cure the violation within three months of its receipt of notice of the violation. If the issue has been resolved within such a three-month period, no termination or other action may be taken.
Land Use Rights in Russia
Russian legislation prohibits the carrying out of any commercial activity, including mineral extraction, on a land plot without appropriate surface land use rights. Land use rights are needed and obtained for only the portions of the license area actually being used, including the plot being mined, access areas and areas where other mining-related activity is occurring.
Under the Land Code, companies generally have ownership or lease rights with regard to land in the Russian Federation.
A majority of land plots in the Russian Federation is owned by federal, regional or municipal authorities who, through bidding (carried out in the form of an auction) or without bidding, can sell, lease or grant other use rights to the land to third parties.
Our mining subsidiaries generally have entered into long-term lease agreements for their surface land within the specified license mining area. Under Russian law, a lessee generally has a right to enter into a new land lease agreement with a lessor upon the expiration of a land lease. In order to renew a land lease agreement, the lessee must apply to the lessor (usually state or municipal authorities) for a renewal prior to the expiration of the agreement. Any land lease agreement for a term of one year or more must be registered with the relevant state authorities.
Environmental Legislation in Russia
We are subject to laws, regulations and other legal requirements relating to the protection of the environment, including those governing the emission and discharge of substances into the air and water, the formation, distribution and disposal of hazardous substances and waste, the cleanup of contaminated sites, flora and fauna protection and wildlife protection. Issues of environmental protection in Russia are regulated primarily by the Federal Law “On Environmental Protection” dated January 10, 2002, as amended (the “Environmental Protection Law”), as well as by a number of other federal, regional and local legal acts.
Since 2008, the Ministry of Natural Resources and Ecology has been working on significant amendments to the Environmental Protection Law and other regulations. These amendments have already come into force or are gradually coming into force. The purpose of the amendments is to strengthen liability for companies’non-compliance with environmental laws and regulations, to improve the distribution of functions between state environmental agencies at both the federal and regional levels, to increase the role of public control over compliance with environmental standards, as well as to stimulate the use of the best available environmental technologies in production processes.
The amendments, in particular, divide objects that have a negative impact on the environment into four categories depending on the degree of impact on the environment. The environmental protection requirements that apply differ depending on the relevant impact category and include environmental impact charges, permission documents and control procedures. The first category includes objects that have a significant negative impact on the environment (to which, therefore, the strictest environmental protection requirements apply) and the fourth category includes objects that have minimal environment impact. Among other things, pursuant to the adopted amendments, contemplate that starting from 2020 charges for negative environmental impact exceeding regulatory thresholds will increase. Furthermore, the liability for certain environmental violations has been enhanced recently, and the fines for certain environmental offenses, for example, in connection with violations of water use requirements,statutory limits have increased by 154 times the current amounts.amounts for the emission and discharge of pollutants into the air and water (coefficient 100 instead of 25) and by 5 times the current amounts for the disposal of industrial and consumer waste (coefficient 25 instead of 5). See “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — More stringent environmental laws and regulations or more stringent enforcement or findings that we have violated environmental laws and regulations could result in higher compliance costs and significant fines and penalties, cleanup costs and compensatory damages, or require significant capital investment, or even result in the suspension of our operations, which could have a material adverse effect on our business, financial condition, results of operations and prospects.”
Pay-to-pollute
The Environmental Protection Law and other Russian environmental protection legislation establish a“pay-to-pollute” regime administered by federal and local authorities.“Pay-to-pollute” (or payments for environmental pollution) is a form of mandatory reimbursement to the Russian government for damage caused to the environment.
The Russian government has established standards relating to the permissible impact on the environment and, in particular, standards of permissible emissions and discharges and waste disposal limits. In case ofnon-compliance with the statutory standards a company may obtain temporary approved limits on emissions and discharges on the basis of permits valid only during the period of implementation of environmental measures. The establishment of limits is allowed only upon the availability of a plan for emissions and discharges reduction agreed with Rosprirodnadzor. The emissions and discharges reduction plan is required to be implemented within a specific period with an annual submission of a report on its implementation to Rosprirodnadzor. Rosprirodnadzor may revoke the limits, if the company fails to implement measures to reduce emissions and discharges in a timely manner. If, by the end of that period, the company’s emissions and discharges are still in excess of the statutory standards, a new plan must be submitted to Rosprirodnadzor for review and approval in order to receive new limits.
Fees for the emission/discharge per tonne of each contaminant into air and water and fees for waste disposal are established by governmental authorities. These fees are determined on a sliding scale for both the statutory standards and individually approved limits on emissions and discharges, as well as for pollution in excess of these limits: the lowest fees are imposed for pollution within the statutory standards, intermediate fees are imposed for pollution within the individually approved temporary limits (within limit fees; exceed the fees within the statutory standards by 5 times) and the highest fees are imposed for pollution exceeding such limits (above-limit fees; exceed the fees within the individually approved temporary limits by 5 times). Thus, above-limit fees exceed the fees within the statutory standards by 25 times. In accordance with recent amendments to the Environmental Protection Law, starting from January 1, 2020, environmental impact charges exceeding regulatory thresholds in certain casesabove-limit fees on emissions and discharges will be increasedexceed the fees within the statutory standards by up to 100 times current fees as statutorily prescribed.times. Payment of above-limit fees does not relieve the company from the responsibility as provided by Russian law, as well as the development and implementation of environmental measures aimed at reducing the negative impact on the environment. In 2017,2019, we incurred above-limit fees and penalties in Russia in the amount of approximately 67.8 million rubles.RUB 121.2 million.
Environmental expert review
According to the Federal Law “On Environmental Expert Review” dated November 23, 1995, as amended (the “EER Law”), environmental expert review is a process of verifying the compliance of project documentation with environmental standards and technical regulations for the purpose of preventing a negative environmental impact. The EER Law provides for the main principles for conducting environmental expert review and for the type of documentation which is subject to such review.
In relation to our operating companies, all documentation underlying the issuance of some of our licenses is subject to environmental expert review.
Review of documentation related to capital construction is regulated under the Urban Development Code, dated December 29, 2004, as amended (the “Urban Development Code”). The Urban Development Code provides for governmental inspection to verify the compliance of project documentation with relevant technical regulations, including sanitary-epidemiological and environmental regulations, requirements for the protection of objects of cultural heritage, as well as fire, industrial, nuclear and other kinds of safety requirements, and compliance with the results of engineering surveys with relevant technical regulations.
Environmental enforcement authorities
Currently state environmental regulation is administered by several federal services and agencies and their regional subdivisions, in particular, Rosprirodnadzor, the Federal Service for Hydrometrology and Environmental Monitoring, Rosnedra, the Federal Agency for Forestry, the Federal Agency for Water Resources and some others. Included in these agencies’ sphere of responsibility are environmental preservation and control, enforcement and observance of environmental legislation, drafting and approving regulations and filing court claims to recover environmental damages. The statute of limitations for such claims is 20 years.
The Russian federal government and the Ministry of Natural Resources and Ecology are responsible for coordinating the work of the federal services and agencies engaged in state environmental regulation.
The structure of environmental enforcement authorities described above was established in 2004. This structure was subjected to certain changes in 2008 and 2010. In particular, the Ministry of Natural Resources was transformed into the Ministry of Natural Resources and Ecology. In late 2010, this structure was further changed and the powers previously held by Rostekhnadzor in the field of environmental protection regarding the limitation of negative industrial impact, waste treatment and state environmental impact assessments were transferred to Rosprirodnadzor which is coordinated by the Ministry of Natural Resources and Ecology.
Environmental liability
If the operations of a company violate environmental requirements or cause harm to the environment or any individual or legal entity, a court action may be brought to limit or ban these operations and require the company to remedy the effects of the violation. Any company or employees that fail to comply with environmental regulations may be subject to administrative and/or civil liability, and individuals may be held criminally liable. Courts may also impose cleanup obligations on violators in lieu of or in addition to imposing fines or other penalties to compensate for damages.
Subsoil licenses generally require certain environmental commitments. Although these commitments can be substantial, the penalties for failing to comply and the reclamation requirements are generally low; however, failure to comply with reclamationenvironmental requirements can result in a suspension of mining operations.
Reclamation
We conduct our reclamation activities for land damaged by production in accordance with the Basic Regulation on Land Reclamation, Removal, Preservation, and Rational Use of the Fertile Soil Layer, approved by the Order of the Ministry of Natural Resources No. 525/67 dated December 22, 1995.current environmental legislation. In general, our reclamation activities involve both a technical stage and a biological stage. In the technical stage, we backfill the pits, grade and terrace mound slopes, level the surface of the mounds, and add clay rock on top for greater adaptability of young plants. In the biological stage, we plant conifers (pine, larch, cedar) on horizontal and gently sloping surfaces and shrubs and bushes to reinforce inclines. Russian environmental regulations do not require mines to achieve the approximate original contour of the property as is required, for example, in the United States. Generally, reclamation should ensure the restoration of disturbed lands for their further use in agricultural, forestry, water management, recreational and other purposes. In 2017,2019, we incurred reclamation costs in Russia of approximately 79 million rubles.RUB 61 million.
Kyoto Protocol and the United Nations Framework Convention on Climate Change
In December 1997, in Kyoto, Japan, the signatories to the United Nations Convention on Climate Change established individual, legally binding targets to limit or reduce greenhouse gas emissions by developed nations. This international agreement, known as the Kyoto Protocol, came into force on February 16, 2005. At the Doha 2012 United Nations Climate Change Conference Russia, Japan and some other countries announced suspension of their participation in the Kyoto Protocol.
In December 2015 at the Paris climate conference, 196 countries adopted the United Nations Framework Convention on Climate Change which is due to enterChange. Russia ratified the Paris Agreement and it came into force in 2020.on November 6, 2019. The agreement sets out a global action plan to avoid climate change. The Russian Federation shall develop a long-term plan to reduce greenhouse gas emissions and shall establish a strategy on adaptation to climate change. In 2015-2017, the Ministry of Natural Resources and Ecology of the Russian Federation has approved a number of methodology guidelines for the quantification of the amount of greenhouse gas emissions by organizations conducting business and other activities in Russia. Further Russia’s steps on implementationIn 2018, the Ministry of Economic Development of the United Nations Framework ConventionRussian Federation proposed a draft law on state regulation of greenhouse gas emissions. This draft law, if enacted, would establish target limits for greenhouse gas emissions, general rules and guidelines for emitters and introduce permits for greenhouse gas emissions. The draft law is at the stage of development, and it is hard to predict if or when it would be adopted into a law.
Climate Change could restrict our operations and/or impose significant costs or obligations on us, including requiring additional capital expenditures, modifications in operating practices, and additional reporting obligations.
Technical Regulations
We are subject to various technical regulations and standards which apply to industrial manufacturing businesses. The Federal LawNo. 184-FZ “On Technical Regulation” dated December 27, 2002, as amended (the “Technical Regulation Law”) has introduced a new regime for the development, enactment, application and enforcement of mandatory rules applicable to production, manufacturing, storage, transportation, sales and certain other operations and processes, as well as new regulations relating to the quality of products and processes, including technical regulations, standards and certification. It was expected that these rules or technical regulations would replace the previously adopted state standards (theso-called GOSTs). Currently, national and interstate standards which would standardize technical regulations are being developed. However, mostconsiderable part of technical regulations have not been implemented yet, and, in the absence of such technical regulations, the existing federal laws and regulations, including GOSTs, that prescribe rules for different products and processes remain in force to the extent that they protect health, property, the environment and/or consumers. In addition, the federal standardization authority has declared GOSTs and interstate standards adopted before July 1, 2003 to be the applicable national standards.
In certain circumstances, companies are required to obtain certification of compliance with applicable technical regulations, standards and terms of contracts. A number of our products must be certified. Where certification is not mandatory, a company may elect voluntary certification by applying for a compliance certificate from the relevant certification authorities. Following the issuance of such certificate, the applicant has the right to use the relevant compliance mark on its products.
Health and Safety Regulations in Russia
Due to the nature of our business, much of our activity is conducted at industrial sites with a large number of workers, and industrial safety and workplace safety issues are of significant importance to the operation of these sites.
The principal law regulating industrial safety is the Federal Law “On Industrial Safety of Hazardous Production Facilities,” dated July 21, 1997, as amended (the “Safety Law”). The Safety Law applies, in particular, to production facilities and sites where certain activities are conducted, including sites where load-lifting machines are used, where melts of ferrous and nonferrous metals are produced, used, stored and transported, where hazardous substances are stored and used (including allowed concentrations) and where certain types of mining is done. There are also regulations that address safety rules for coal mines, the production and processing of ore, the blast-furnace industry, steel smelting, alloy production and nickel production. Additional safety rules also apply to certain industries, including fuel and energy complex, metallurgical and coke-chemical industries and the foundry industry.
The Safety Law provides for hazardous production facilities of four classes from class IV to class I, with class IV being less hazardous and class I being the most hazardous. The safety and compliance requirements set up by the Safety Law apply to each facility depending on their class of hazard. Each existing hazardous production facility was to bere-registered with the state register by January 1, 2014 and be assigned with a hazard class. Were-registered hazardous production facilities at our operations in accordance with the applicable law.
Any construction, reconstruction, liquidation or other activities in relation to regulated industrial sites is subject to a state industrial safety review. Any deviation from project documentation in the process of construction, reconstruction or liquidation of industrial sites is prohibited unless reviewed by a licensed expert organization and approved by Rostekhnadzor.
In addition, the Safety Law establishes an alternative form of industrial safety regulation that is based on risk assessment rather than prescriptions of obligatory requirements and standards imposed by Rostekhnadzor. A
company that operates a hazardous production facility may develop a safety case, a document which describes that the facility has been designed and operated in a way to limit any risks of major accident. The Safety Law considers that in drafting the safety case, the relevant companies will be able to refer to specific safety arrangements and safety analyses as confirmation of having certain safety measures in place. To make these arrangements fully operational further changes will need to be introduced into relevant laws and regulations.
Companies that operate such production facilities and sites have a wide range of obligations under the Safety Law and the Labor Code of Russia of December 30, 2001, as amended (the “Labor Code”). In particular, they must limit access to such sites to qualified specialists, maintain industrial safety controls and carry insurance for third-party liability for injuries caused in the course of operating industrial sites. Russian regulations require these companies to enter into contracts with professional emergency response units or create their own emergency response services in certain cases, conduct personnel trainings and drills, create systems to cope with and notify the authorities of accidents and maintain these systems in good working order. Effective from January 1, 2014, companies that operate industrial sites of hazard classes I and II must implement industrial safety management systems to prevent accidents and incidents at hazardous production facilities and develop certain emergency response plans.
Companies that operate production sites of hazard classes I and II and handle hazardous substances in quantities set by the Safety Law must also prepare declarations of industrial safety which summarize the risks associated with operating a particular production site and measures the company has taken and will take to mitigate such risks and use the site in accordance with applicable industrial safety requirements. Such declarations must be adopted by the chief executive officer of the company, who is personally responsible for the completeness and accuracy of the data contained therein. The industrial safety declaration as well as a state industrial safety review are required for the issuance of a license permitting the operation of a hazardous production facility.
Rostekhnadzor has broad authority in the field of control and management of industrial safety. In case of an accident, a special commission led by a representative of Rostekhnadzor conducts a technical investigation of the cause. The company operating the hazardous production facility where the accident took place bears all costs of an investigation. Rostekhnadzor officials have the right to access production sites and may inspect documents to ensure a company’s compliance with safety rules. Rostekhnadzor may suspend for up to 90 days or initiate a court decision to terminate operations of companies and/or impose administrative liability on officers of such companies. Moreover, new rules on public control came into force in 2017. This type of control is performed on a voluntary basis by public inspectors who comply with certain qualification requirements.
Any company or individual violating industrial safety rules may incur administrative and/or civil liability, and individuals may also incur criminal liability. A company that violates safety rules in a way that negatively impacts the health of an individual may also be obligated to compensate the individual for lost earnings, as well as health-related damages.
Russian Antimonopoly Regulation
The Federal Law “On Protection of Competition,” dated July 26, 2006, as amended (the “Competition Law”), provides for a mandatorypre-approval by the FAS of the following actions:
other than in respect to financial organizations, such as banks, an acquisition by a person (or its group) of more than 25% of the voting shares of a Russian joint-stock company (orone-third of the interests in a Russian limited liability company), except upon incorporation, and the subsequent increase of these stakes to more than 50% of the total number of the voting shares and more than 75% of the voting shares(one-half andtwo-thirds of the interests in a Russian limited liability company), or acquisition by a person (or its group) of ownership or rights of use with respect to the core production assets (other than land andnon-industrial buildings, constructions, premises and parts thereof or constructions in
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mergers and consolidations of entities, other than financial organizations, if their aggregate asset value (the aggregate asset value of the groups of persons to which they belong) exceeds RUB 7 billion, rubles, or total annual revenues of such entities (or groups of persons to which they belong) for the preceding calendar year exceed RUB 10 billion rubles;billion;
founding of a business entity, if its charter capital is paid by the shares (or limited liability company interests) and/or the assets (other than cash) of another business entity (other than financial organization) or the newly founded business entity acquires shares (or limited liability company interests) and/or the assets (other than cash) of another business entity based on a transfer act or a separation balance sheet and rights in respect of such shares (or limited liability company interests) and/or assets (excluding monetary funds) as specified above, at the same time provided that the aggregate asset value of the founders (or group of persons to which they belong) and the business entities (or groups of persons to which they belong) which shares (or limited liability company interests) and/or assets (other than cash) are contributed to the charter capital of the newly founded business entity exceeds RUB 7 billion, rubles, or total annual revenues of the founders (or group of persons to which they belong) and the business entities (or groups of persons to which they belong) which shares (or limited liability company interests) and/or assets are contributed to the charter capital of the newly founded business entity for the preceding calendar year exceed RUB 10 billion rubles;billion; and
entering into joint venture agreements between competitors, if their aggregate asset value (the aggregate asset value of the groups of persons to which they belong) exceeds RUB 7 billion, rubles, or total annual revenues of such entities (or groups of persons to which they belong) for the preceding calendar year exceed RUB 10 billion rubles.billion.
The above requirements for a mandatorypre-approval by the FAS will not apply if the transactions are performed by members of the same group, if the information about such a group of persons was disclosed to the antimonopoly authority and there were no changes within one month prior to the date of the transaction within that group of persons. In such cases, the FAS must be notified of the transactions subsequently in accordance with Russian anti-monopoly legislation. Furthermore, the requirement for a mandatory approval of transactions/actions described above will not apply if the transactions/actions are performed by members of the same group where a company and individual or an entity, if such an individual or an entity holds (either due to its participation in this company or based on the authorities received from other persons) more than 50% of the total amount of votes in the equity (share) capital of this company.
A transaction entered into in violation of the above requirements may be invalidated by a court decision pursuant to a claim brought by the FAS if the FAS proves to the court that the transaction leads or could lead to
the limitation of competition in the relevant Russian market. The FAS may also issue binding orders to companies that have violated the applicable antimonopoly requirements and bring court claims seeking
liquidation,split-up orspin-off of business entities if a violation of antimonopoly laws was committed by such business entities. In addition, a company may be subject to the administrative fine of an amount from 150RUB 150,000 to 250 thousand rublesRUB 250,000 for the failure to file a FAS post-transactional notification and from 300RUB 300,000 to 500 thousand rublesRUB 500,000 for the failure to file an application for FASpre-approval of the transaction.
Under the Competition Law, a company with a dominant position in the relevant market is prohibited from misusing its dominant position. Specifically, such company is prohibited from:
establishing and maintaining monopolistically high or monopolistically low prices of goods;
withdrawing goods from circulation, if the result of such withdrawal is an increase in the price of goods;
imposing contractual terms upon a counterparty which are unprofitable for the counterparty or not related to with the subject matter of agreement (i.e., terms that are economically or technologically unjustified);
reducing or terminating, without economical or technological justification, production of goods if there is a demand for the goods or orders for their delivery have been placed and it is possible to produce them profitably;
refusing or evading, without economical or technological justification, to enter into a contract with customers in cases when the production or delivery of the relevant goods is possible;
establishing without economical, technological or other justification different prices for the same goods;
establishing unjustifiably high or unjustifiably low price of a financial service by a financial organization;
creating discriminatory conditions;
creating barriers to entry into the market for the relevant goods or forcing other companies to leave the market;
violating pricing procedures established by law; and
manipulating prices in the wholesale and/or retail electricity (capacity) markets.
In 2016, as a result of amendments to the Competition Law, the register of entities with a market share exceeding 35% in the relevant market was abolished. Inclusion of a company in the register implied that it might be subject to additional FAS oversight, but at the same time provided the company with information on the occupied market share. The abolition of the register creates additional antimonopoly risks to the company.
In order to prevent the creation of discriminatory conditions, the Government of the Russian Federation can establish rules fornon-discriminatory access to goods that are produced and/or sold by a business entity holding a dominant position and not included into the register of natural monopolies whose share exceeds 70% in the relevant market. Such rules may be established in case a decision of the antimonopoly authority on the fact of abuse of a dominant position by such business entity entered into force.
In the event of a breach of any terms of business conduct required by the FAS, the FAS may initiate proceedings to investigate violations of antimonopoly legislation. If a violation of antimonopoly legislation is identified, the FAS may initiate administrative proceedings which may result in the imposition of a fine calculated on the basis of the annual revenues received by the company in the market where such violation was committed. Such fines may include an administrative fine of an amount from 300 thousandRUB 300,000 to oneRUB 1 million rubles
or, if such violation has led or may lead to the prevention, limitation or elimination of competition, an administrative fine of up to 15% of the proceedsrevenue from sale of all goods, works and services in the market where such violation was
committed, but not more than 2% of the aggregate amount of proceedstotal revenue from sale of all goods, works and services in case of abuse of a dominant position and not more than 4% of the aggregate amount of proceedstotal revenue from sale of all goods, works and services in case of conclusion of an inadmissible agreement according to the law. Russian legislation also provides for criminal liability of company executives for violations of certain provisions of antimonopoly legislation. Furthermore, for systematic violations, a court may order, pursuant to a suit filed by the FAS, a compulsorysplit-up orspin-off of the violating company, and no affiliation can be preserved between the new entities established as result of such a mandatory reorganization.
The FAS has determined certain of our companies to have a dominant position in certain markets and these companies are subject to directive issued by the FAS which impose certain restrictions on their commercial activities. See “Risk Factors — Risks Relating to Our Business and Industry — Antimonopoly regulation could lead to sanctions with respect to the subsidiaries we have acquired or established or our prices, sales volumes and business practices.”
The Strategic Industries Law
The Strategic Industries Law, dated April 29, 2008, as amended, regulates foreign investments in companies with strategic importance for the national defense and security of the Russian Federation (“Strategic Companies”). The Strategic Industries Law provides an exhaustive list of strategic activities, engagement in which makes a company subject to restrictions. Among others, the list of such activities includes exploration and/or production of natural resources on subsoil plots of federal importance. Subsoil plots of federal importance include plots with deposits of uranium, diamonds, high-purity quartz ore, nickel, cobalt, niobium, lithium, beryllium, tantalum, yttrium-group rare-earth metals and platinoid metals. They also include deposits of oil, gas, vein gold and copper which are above certain size limits specified in the Subsoil Law, as well as subsoil plots of the internal sea, territorial sea and continental shelf; and subsoil plots, the use of which requires the use of land plots included in the category of national defense and security land. The Strategic Subsoil List was first officially published inRossiyskaya Gazeta on March 5, 2009. Services rendered by business entities included into the register of natural monopolies pursuant to the Federal Law “On Natural Monopolies,” dated August 17, 1995, as amended, with certain exceptions, are also considered to constitute strategic activity. Furthermore, production and sale of metals, alloys with special features or raw materials that are used in production of weapons and military equipment is also deemed to be a strategic activity starting from July 2017. The production and distribution of industrial explosives is also deemed to be activity of strategic importance for national defense and homeland security.
Investments resulting in a foreign investor or a group of entities obtaining control over a Strategic Company, or acquiring fixed assets of a Strategic Company representing 25% or more of its balance sheet value, require prior approval from state authorities. The procedure for issuing such consent will involve a special governmental commission on the control of foreign investments (the “Governmental Commission”), which was established by a government resolution dated July 6, 2008 as the body responsible for granting such consents, and the FAS, which is authorized to process applications for consent from foreign investors and to issue such consents based on the decisions of the Governmental Commission. “Control” for these purposes means an ability to determine, directly or indirectly, decisions taken by a Strategic Company, whether through voting at the general shareholders’ (or limited liability company interest-holders’) meeting of the Strategic Company, participating in the board of directors or management bodies of the Strategic Company, or acting as the external management organization of the Strategic Company or otherwise. Thus, generally, “control” will be deemed to exist if any foreign investor or a group of entities acquires more than 50% of the shares (or limited liability interests) of a Strategic Company, or if by virtue of a contract or ownership of securities with voting rights it is able to appoint more than 50% of the members of the board of directors or of the management board of a Strategic Company. However, there are special provisions for Strategic Companies involved in the exploration or extraction of natural resources on plots of federal importance (“Subsoil Strategic Companies”): a foreign
investor or group of entities is considered to have control over a Subsoil Strategic Company when such foreign investor or group of entities holds directly or indirectly 25% or more of the voting shares of the Subsoil Strategic
Company or holds the right to appoint its sole executive officer and/or 25% or more of its management board or has the unconditional right to elect 25% or more of its board of directors. At that, pursuant to the amendments to the Strategic Industries Law, which were adopted on May 31, 2018 and entered into force on June 12, 2018, foreign investors which do not submit to the FAS information on their beneficiaries, beneficial owners and controlling parties, or organizations controlled by such foreign investors, are prohibited from obtaining control over a Strategic Company or acquiring fixed assets of a Strategic Company representing 25% or more of its balance sheet value.
Furthermore, in case a foreign investor or its group of entities which is a holder of securities of a Strategic Company, Subsoil Strategic Company or other entity which exercises control over these companies becomes a direct or indirect holder of voting shares in amount which is considered to give them direct or indirect control over these companies in accordance with the Strategic Industries Law due to a change in the allocation of votes resulting from the procedures provided by Russian law (e.g. as a result of abuy-back by the relevant company of its shares, conversion of preferred shares into common shares or holders of preferred shares becoming entitled to vote at a general shareholders’ meeting in cases provided by Russian law), such shareholders will have to apply for state approval of their control within three months of receiving such control. If the Governmental Commission refuses to grant the approval the shareholders shall sell the relevant part of their respective shares or participatory interest, and if they do not comply with this requirement, a Russian court can deprive such foreign investor or its group of entities of the voting rights in such Strategic Company upon a claim of the competent authority. In such cases, the shares of the foreign investor are not counted for the purposes of establishing a quorum and reaching the required voting threshold at the general shareholders’ meeting of the Strategic Company.
Any transfers of a stake, or certain rights, in a Strategic Company or in a Subsoil Strategic Company to foreign investors that are (i) companies controlled by the Russian Federation, the constituent entity of the Russian Federation or (ii) companies controlled by Russian nationals, provided that such Russian nationals are Russian tax residents and do not have other nationality, will not require prior approval from the state authorities.
If a foreign investor or its group of entities obtains control over a Strategic Company in violation of the Strategic Industries Law, the relevant transaction is void, and in certain cases a Russian court can deprive such foreign investor or group of entities of the voting rights in such Strategic Company upon a claim by the competent authority. In addition, resolutions of the general shareholders’ meetings or other management bodies of a Strategic Company adopted after a foreign investor or group of entities obtained control over the Strategic Company in violation of the Strategic Industries Law, as well as transactions entered into by the Strategic Company after obtaining such control, may be held invalid by a court upon a claim by the competent authority. See “Item 3. Key Information — Risk Factors — Risks Relating to the Russian Federation — Legal risks and uncertainties — Expansion of limitations on foreign investment in strategic sectors could affect our ability to attract and/or retain foreign investments.”
Employment and Labor Regulations in Russia
Labor matters in Russia are governed primarily by the Labor Code. In addition to this core legislation, relationships between employers and employees are regulated by federal laws, such as the Law “On Employment in the Russian Federation,” dated April 19, 1991, as amended, and the Law “On Compulsory Social Insurance Against Industrial Accidents and Occupational Diseases,” dated July 24, 1998, as amended; legal acts of executive authorities; and local government acts related to labor issues.
Employment contracts
As a general rule, employment contracts for an indefinite term are entered into with all employees. Russian labor legislation generally disfavors fixed-term employment contracts. However, an employment contract may be entered into for a fixed term of up to five years in certain cases where labor relations may not be established for
an indefinite term due to the nature of the duties or the conditions of the performance of such duties, as well as in other cases expressly identified by the Labor Code or other federal law. In some cases it is also possible to enter into an employment contract for the employee to perform specified tasks. All terms and conditions of employment contracts are regulated by the Labor Code.
Under Russian law, employment may be terminated by mutual agreement between the employer and the employee at the end of the term of a fixed-term employment contract or on the grounds set out in the Labor Code as described below. An employee has the right to terminate his or her employment contract with a minimum of two weeks’ notice (or one month’s notice for a company’s chief executive officer), unless the employment contract is terminated before the notice period ends by mutual agreement between employer and employee.
An employer may terminate an employment contract only on the basis of the specific grounds enumerated in the Labor Code, including,inter alia:alia:
liquidation of the enterprise or downsizing of staff;
failure of the employee to comply with the position’s requirements due to incompetence, as confirmed by the results of an attestation;
repeated failure of the employee to fulfill his or her work duties without valid reason, provided that the employee has been disciplined previously;
entering the workplace under the influence of alcohol, narcotics or other intoxicating substances;
a single gross breach by an employee of his or her work duties, including truancy;
disclosure of state secrets or other confidential information, which an employee has come to know during fulfillment of his professional duties;
embezzlement, willful damage or destruction of assets, and misappropriation as confirmed by a court decision or a decision by another competent governmental authority;
failure to comply with safety requirements in the workplace if such failure to comply caused injuries, casualties or catastrophe; and
provision by the employee of false documents upon entry into the employment contract.
An employee dismissed from an enterprise due to downsizing or liquidation is entitled to receive compensation and salary payments for a certain period of time, depending on the circumstances.
The Labor Code also provides protections for specified categories of employees. For example, except in cases of liquidation of an enterprise and other events specified in the Labor Code, an employer cannot dismiss minors, pregnant women, mothers with a child under the age of three, single mothers with a child under the age of 14 or other persons caring for a child under the age of 14 without a mother.
Any termination by an employer that is inconsistent with the Labor Code requirements may be invalidated by a court, and the employee may be reinstated. Lawsuits resulting in the reinstatement of illegally dismissed employees and the payment of damages for wrongful dismissal are increasingly frequent, and Russian courts tend to support employees’ rights in most cases. Where an employee is reinstated by a court, the employer must compensate the employee for unpaid salary for the period between the wrongful termination and reinstatement, as well as for mental distress.
Work time
The Labor Code generally sets the regular working week at 40 hours. Any time worked beyond 40 hours per week, as well as work on public holidays and weekends, must be compensated at a higher rate.
For employees working in hazardous or harmful conditions, the regular working week is decreased by four hours. Some of our production employees qualify for this reduced working week.
Annual paid vacation leave under the law is 28 calendar days. Our employees who work in mines and pits or work in harmful conditions may be entitled to additional paid vacation ranging from 7 to 42 business days.
TheSince January 1, 2019, the retirement age in the Russian Federation is 6065 years for males and 5560 years for females. However, employees who work in underground and open pit mines or do other work in potentially harmful conditions have the right to retire at an earlier age. Early retirement ages are established by the applicable legislation.
Salary
In accordance with Russian law, the minimum salary in Russia is 9,489 rubles. StartingRUB 12,130 per month starting from MayJanuary 1, 2018, the minimum salary will be increased to the minimum subsistence level and will amount to 11,163 rubles.2020.
Strikes
The Labor Code defines a strike as the temporary and voluntary refusal of workers to fulfill their work duties with the intention of settling a collective labor dispute. Russian legislation contains several requirements for legal strikes. Participation in a legal strike may not be considered by an employer as grounds for terminating an employment contract, although employers are generally not required to pay wages to striking employees for the duration of the strike. Participation in an illegal strike may be adequate grounds for termination of employment.
Trade unions
Although Russian labor regulations have decreased the authority of trade unions compared with the past, they retain influence over employees and, as such, may affect the operations of large industrial companies in Russia, such as Mechel. In this regard, our management routinely interacts with trade unions in order to ensure the appropriate treatment of our employees and the stability of our business.
The activities of trade unions are generally governed by the Federal Law “On Trade Unions, Their Rights and Guarantees of Their Activity,” dated January 12, 1996, as amended (the “Trade Union Law”). Other applicable legal acts include the Labor Code, which provides for more detailed regulations relating to activities of trade unions.
The Trade Union Law defines a trade union as a voluntary union of individuals with common professional and other interests that is incorporated for the purposes of representing and protecting the rights and interests of its members. National trade union associations, which coordinate activities of trade unions throughout Russia, are also permitted.
As part of their activities, trade unions may:
negotiate collective contracts and agreements such as those between the trade unions and employers, federal, regional and local governmental authorities and other entities;
monitor compliance with labor laws, collective contracts and other agreements;
access work sites and offices, and request information relating to labor issues from the management of companies and state and municipal authorities;
represent their members and other employees in individual and collective labor disputes with management;
organize and participate in strikes; and
monitor redundancy of employees and seek action by municipal authorities to delay or suspend mass layoffs.layoffs; and
appoint representatives of employees authorized to participate in meetings of the collegial management body with a consultative vote.
Russian laws require that companies cooperate with trade unions and do not interfere with their activities. Trade unions and their officers enjoy certain guarantees as well, such as:
legal restrictions as to rendering redundant employees elected or appointed to the management of trade unions;
retention of job positions for those employees who stop working due to their election to the management of trade unions;
protection from dismissal for employees who previously served in the management of a trade union for two years after the termination of the office term, except where a company is liquidated or the employer is otherwise entitled to dismiss the employee; and
provision of necessary equipment, premises and vehicles by the employer for use by the trade union free of charge, if provided for by a collective contract or other agreement.
If a trade union discovers any violation of work condition requirements, notification is sent to the employer with a request to cure the violation and to suspend work if there is an immediate threat to the lives or health of employees. The trade union may also apply to state authorities and labor inspectors and prosecutors to ensure that an employer does not violate Russian labor laws. Trade unions may also initiate collective labor disputes, which may lead to strikes.
To initiate a collective labor dispute, trade unions present their demands to the employer. The employer is then obliged to consider the demands and notify the trade union of its decision. If the dispute remains unresolved, a reconciliation commission attempts to end the dispute. If this proves unsuccessful, collective labor disputes are generally referred to mediation or labor arbitration. Although the Trade Union Law provides that those who violate the rights and guarantees provided to trade unions and their officers may be subject to disciplinary, administrative and criminal liability, no specific consequences for such violations are set out in Russian legislation.
Regulation of Russian Electricity Market
Industry background
The functioning of the energy system of the Russian Federation is based on a combination of technological and commercial infrastructure which operates under state control, on the one hand, and organizations engaged in the generation and sale of electricity which interact with each other in a competitive environment, on the other hand.
Pursuant to the Electric Power Industry Law, the electric power industry entities are organizations engaged in the production of electricity, heat energy and capacity, purchase and sale of electricity and capacity, power supply of consumers, rendering services in electricity transmission, operational-dispatching management in the electric power industry, sales of electric energy (capacity), organizing of purchase and sale of electric energy and capacity.
Generating companies carry out generation and sale of electricity in the wholesale or retail markets to sales organizations or end consumers. Sales organizations purchase electricity in the wholesale and retail markets and sell it to end consumers.
Electricity consumers are natural and legal persons who purchase electricity for their own household and/or production needs. Large consumers may purchase electricity directly on the wholesale market provided that they fulfill the requirements for participants of the wholesale electricity and capacity market. Other categories of consumers purchase electricity from power sales companies, including guaranteeing suppliers, as well as may purchase electricity from electricity producers who are not participants of the wholesale electricity and capacity market.
System Operator (SO UPS JSC), which is wholly-owned by the state, performs operational-dispatching management in the Unified Energy System of Russia. The main function of the System Operator is to control of the compliance of technological parameters of the energy system operation. The System Operator participates in the maintenance of the wholesale electricity and capacity market.
Grid operators transmit electricity through electric grids and carry out technological connection of power receiving devices of electricity consumers, power facilities of generating companies and power grid facilities of other owners to electric grids. Activities of grid operators are a natural monopoly and are regulated by the state.
Organizations of commercial infrastructure include Trading System Administrator JSC, Financial Settling Center JSC and Association Nonprofit Partnership Market Council. Association Nonprofit Partnership Market Council was established in order to balance the interests of the electricity market participants and to ensure the unity of the commercial infrastructure operation. Activities of infrastructure organizations, including pricing and conditions of interaction with contractors, are subject to state regulation and control.
In accordance with amendments to the Electric Power Industry Law and other legislative acts which entered into force on December 29, 2017,25, 2018, power sales activity is subject to compulsory licensing since December 30, 2018.effective July 1, 2020. Power sales activity is the sale of electricity produced and/or purchased in the retail electricity market both within and outside the unified national electric grid of Russia. A prerequisite for granting a license is compliance with licensing requirements.
Sales of electricity
The Russian electricity market consists of wholesale and retail electricity and capacity markets. The wholesale electricity and capacity market encompasses European territory of the Russian Federation, the Urals and Siberia and is divided into two pricing zones. The first pricing zone includes the European territory of the Russian Federation and the Urals and the second pricing zone includes Siberia. In addition, there areso-callednon-pricing zones, namely the regions of the Far East, the Arkhangelsk region, the Kaliningrad region and the Komi Republic. Competition in these areas for various technical reasons is not possible yet. Innon-pricing zones sale of electricity in the retail electricity and capacity market is made at regulated prices. The wholesale market provides a framework for large-scale, often interregional, energy trades. The retail electricity market operates within all Russian regional territories and provides a framework formid-scale andend-consumer energy trades. This market is regulated by the respective Regional Energy Committees.
Wholesale electricity market
The wholesale electricity and capacity market is a sphere of distribution of electric energy and capacity within the Unified Energy System of Russia. The wholesale market participants include large producers and consumers of electricity and capacity, as well as other entities that earned the status of an entity of the wholesale market and act on the basis of applicable rules.
Trading on the wholesale electricity and capacity market is conducted in accordance with the agreement on accession to the trading system and wholesale market regulations which are developed and adopted by Association Nonprofit Partnership Market Council.
Electricity trading on the wholesale electricity and capacity market is carried out by means of the classical model of supply and demand balance or through bilateral contracts of purchase and sale of electric energy.
Currently electricity is traded on the basis of the following trading mechanisms:
Regulated bilateral contracts
Regulated contracts are effectivelytake-or-pay obligations at regulated prices defined by the FAS for electricity and capacity volumes. The volumes of electricity to be traded by the generators under regulated
contracts are set up by the FAS annually based on percentages of the volumes of electricity generated in the previous year. The volumes of electricity traded under regulated contracts have gradually declined for the wholesale market when it became fully liberalized in 2011. Starting from January 1, 2011, electricity is traded atnon-regulated prices, except for electricity intended for supply to households.
A generator may provide the volumes of electricity it must sell under regulated contracts either through own generation or through the purchase of electricity on the spot market at market prices. Similarly, its consumers receive electricity at regulated prices in the volumes agreed under the regulated contracts, regardless of their actual needs, and can freely trade the imbalance on the spot market at market prices (either by purchasing additional volumes, if needed, or selling the excess electricity volumes).
Non-regulated bilateral contracts
Electricity supply volumes which are not agreed upon under regulated contracts, as well as all new generation capacity commissioned after January 1, 2007, can be traded by participants of the wholesale market undernon-regulated contracts, on the“one-day-ahead” spot market or on the balancing market. All terms of electricity supply undernon-regulated contracts are subject to free negotiation between sellers and purchasers.
Retail electricity market
The retail market participants include consumers, power supply companies, guaranteeing suppliers, power grid companies and electricity producers which do not supply electricity to the wholesale market.
The retail electricity market operates on the following main principles: (1) end consumers are free to choose between sales companies; (2) end consumers purchase at free prices set on the market, except for contracts with “guaranteeing suppliers”; and (3) “guaranteeing suppliers” cannot refuse to enter into a contract with an end consumer.
“Guaranteeing suppliers” sell electricity under prices that take account of: (1) the prices on the wholesale electricity and capacity market; (2) the sales premium of the particular guaranteeing supplier set by respective regional authorities; and (3) the prices for electricity transmission and distribution through electricity networks.networks; and (4) the prices of services of infrastructure organizations.
Since December 30, 2018,July 1, 2020, power sales activity in the retail electricity market is subject to compulsory licensing.
Heat market
Heat markets are regional retail marketsmarkets. The market is divided into heat energy in hot water and heat pricesenergy in steam. Prices for heat energy in hot water are regulated and set within the general guidelines provided by the FAS and by regional authorities. Minimum and maximum prices for heat energy in hot water, which is traded on the retail markets, are set by the FAS separately for each administrative region of Russia for a period of at least one year. Regional authorities establish the prices for relevant territories within the range set by the FAS and subject to the types and prices of fuel used to produce the heat and the volumes of heat purchased on the relevant territory. Since January 1, 2019, the market of heat energy in steam that is not for household use is no longer regulated by the FAS.
Our Southern Kuzbass Power Plant delivers heat energy (in the form of hot water) at regulated prices to residential and commercial customers in the cities of Kaltan, Osinniki and Mezhdurechensk. Mechel Energo delivers heat energy (in the form of hot water and steam) at regulated prices to residential and commercial customers in the cities of Vidnoye, Chelyabinsk, Chebarkul, Beloretsk and Izhevsk.
EU REACH
On June 1, 2007, the European Union enacted regulations on registration, evaluation, authorization and restrictions of use of chemicals, known as REACH. The purpose of REACH is to ensure a high level of protection of human health and the environment, including the promotion of alternative methods of assessment of hazards of chemical substances.
REACH requires foreign manufacturers importing their chemical substances into the European Union, as well as EU manufacturers producing such substances in quantities of one tonne or more per year, to register these substances with the ECHA and provide the information about the registered substances usage and utilization to the competent authorities of the EU Member States and downstream users upon request. Prior to December 1, 2008, wepre-registered with the ECHA substantially all of the substances that we intended to export to or produce in the European Union. As a next step, we successfully registered with the ECHA the substances that we export to or produce in the European Union in an amount over 1,000 tonnes per year, and which are subject to REACH registration, namely: ferroalloys, coke-chemicals and pig iron exported to the European Union. This registration was completed prior to December 1, 2010 in compliance with the REACH implementation schedule.
Item 4A.Unresolved Staff Comments
None.
Item 5.Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other information in this document. This Item 5 contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements as a result of various factors, including the risks described in Item“Item 3. Key Information — Risk FactorsFactors” and under the caption “Cautionary Note Regarding Forward-Looking Statements.”
In this Item 5, the term “domestic” describes sales by a subsidiary within the country where its operations are located. The term “export” describes cross-border sales by a subsidiary regardless of its location. See note 2625 to the consolidated financial statements.
History of Incorporation
Mechel PAO was incorporated on March 19, 2003, as a joint-stock company holding shares and interests in the charter capitals of various mining and steel companies owned by Igor Zyuzin, Vladimir Iorich and companies controlled by them. These individuals acted in concert from 1995 until December 2006 pursuant to an agreement which required them to vote in the same way. During the period from March through December 2006, Mr. Iorich disposed of his entire interest in Mechel PAO to Mr. Zyuzin, and the agreement terminated on December 21, 2006.
Business Structure
Segments
We have organized our businesses into three segments:
the mining segment, comprising production and sale of coal (metallurgical and steam), coke and chemical products and iron ore concentrate, which supplies raw materials to our steel and power segments and also sells substantial amounts of raw materials to third parties, and includes logistical assets, such as our seaports on the Sea of Japan and on the Sea of Azov, and our railway transportation assets;
the steel segment, comprising production and sale of semi-finished steel products, long products of a wide range of steel grades, carbon and stainless flat products, high value-added metal products, including wire products, stampings and forgings, structural shapes, rails and others, and ferrosilicon, as well as ferrosilicon, and our river port on the Kama River, a tributary of the Volga River; and
the power segment, comprising generation and sale of electricity and heat energy, which supplies electricity and heat energy to our mining and steel segments and also sells a portion of electricity and heat energy to third parties.
The table below sets forth by segments our key mining, steel and power subsidiaries, presented in chronological order by date of acquisition.acquisition/date of incorporation.
Name | Location of Assets | Product/Business | Date Control Incorporation | Voting Interest(1) | ||||||||||||
Mining Segment | ||||||||||||||||
Southern Kuzbass Coal Company | Russia | Coking coal, steam coal, anthracite and PCI | January 1999 | 99.1 | % | |||||||||||
Korshunov Mining Plant | Russia | Iron ore concentrate | October 2003 | 90.0 | % | |||||||||||
Port Posiet | Russia | Seaport: coal warehousing and transshipment | February 2004 | 97.8 | % | |||||||||||
| Mechel Coke | Russia | Coke and chemical products | June 2006 | 100.0 | % | |||||||||||
Moscow Coke and Gas Plant | Russia | Coke and chemical products | October 2006 | 99.5 | % | |||||||||||
Yakutugol | Russia | Coking coal, steam coal | October 2007 | 100.0 | % | |||||||||||
Port Temryuk | Russia | Seaport: coal and metal transshipment | March 2008 | 100.0 | % | |||||||||||
Elgaugol | Russia | Coking coal, steam coal | August 2013 | 51.0 | % | |||||||||||
Elga-road | Russia | Railroad transportation | January 2016 | 51.0 | % | |||||||||||
Steel Segment | ||||||||||||||||
Chelyabinsk Metallurgical Plant | Russia | Semi-finished long and flat steel products | December 2001 | 94.2 | % | |||||||||||
Vyartsilya Metal Products Plant | Russia | Wire products | May 2002 | 93.3 | % | |||||||||||
Beloretsk Metallurgical Plant | Russia | Long steel products, wire products | June 2002 | 94.8 | %(2) | |||||||||||
Urals Stampings Plant | Russia | Stampings and forgings | April 2003 | 93.8 | % | |||||||||||
Mechel Nemunas | Lithuania | Wire products | October 2003 | 100.0 | % | |||||||||||
Izhstal | Russia | Long steel finished products | May 2004 | 90.0 | % | |||||||||||
Port Kambarka | Russia | River port | April 2005 | 90.4 | % | |||||||||||
Bratsk Ferroalloy Plant | Russia | Ferrosilicon | August 2007 | 100.0 | % | |||||||||||
Power Segment | ||||||||||||||||
Mechel Energo | Russia | Power | February 2004 | 100.0 | % | |||||||||||
Southern Kuzbass Power Plant | Russia | Power generation | April 2007 | 98.3 | % | |||||||||||
Kuzbass Power Sales Company | Russia | Electricity distribution | June 2007 | 72.1 | % | |||||||||||
| (1) | The percentages provided in this table are as of December 31, |
| (2) | Effective ownership interest is 91.4% as of December 31, 2019. |
Intersegment sales
We are an integrated group with operations organized into mining, steel and power segments. Our group companies supply materials to other companies in the same reporting segment or different reporting segments. For example, for the year ended December 31, 2017:2019:
The mining segment supplied approximately 40%47% of the steel segment’s iron ore feed requirements, 100% of the steel segment’s coke requirements and 48%43% of the power segment’s coal requirements;
The steel segment supplies wires, ropes, wire products and other metal products to the mining segment for use in itsday-to-day operations; and
Ourco-generation facilities supplied approximately 29%27% of our group’s overall electricity requirements.
The prices at which we record these transfers are based on market prices, and these transactions are eliminated as intercompany transactions for the purposes of our consolidated financial statements. For theperiod-on-period discussion of the results of operations by segments, such transfers are included in segment revenues and cost of sales.
Recent acquisitions and disposals
Set out below is our key disposal during 2015-2017. There were no significant acquisitions and disposals during 2015-2017.
Bluestone. In February 2015, we disposed of 100% of shares in Mechel Bluestone Inc., the holding company of our coal assets in the United States, to a company controlled by the Justice family. The total consideration consisted of: (1) an immediate cash payment of $5 million (RUB 330.3 million as of February 12, 2015); (2) deferred royalty payments on coal mined and sold in the amount of $3.00 (RUB 198.2 as of February 12, 2015) per short ton, capped at $150 million (RUB 9,908.8 million as of February 12, 2015); (3) a portion of a sale price in case of any future sale or disposition of Bluestone and/or its assets, amounting to 12.5% or 10% of the total consideration if the sale transaction closes within five or from five to ten years, respectively, of the sale to the Justice family. Following disposal of certain Bluestone assets by the Justice family, in February 2017, we received $7.9 million (RUB 466.0 million as of February 6, 2017) as a portion of its sale price under relevant transaction documents.2017-2019.
Factors Affecting Our Results of Operations and Financial Condition
Change in reporting currency
Beginning withOur results of operations are affected by a variety of factors, including, but not limited to, the period commencing on January 1, 2014, the presentation currency of our consolidated financial statements is the Russian ruble. Before transition to IFRS, U.S. dollar was the presentation currency of our consolidated financial statements prepared under U.S. GAAP. The reason of adopting the Russian ruble as the presentation currency in the consolidated financial statements under IFRS is to allow a greater transparency of our financial and operating performance as it more closely reflects the profile of our revenue and operating income that are mostly generated in Russian rubles.following:
Cyclical nature of business and impact of macroeconomic factors
Our mining business sells significant amounts of coal to third parties and our revenues depend significantly on these sales. Cyclical and other changes in the world market prices for coal, coke and iron ore affect the results of our mining operations. The changes in these prices result from factors which are beyond our control, such as market supply and demand. The global coal, coke and iron ore supply and demand balance is strongly influenced by interdependent global economic and industrial demand cycles, as well as supply chain-related constraints such as shipping capacity, availability of rolling stock, transportation bottlenecks, production disruptions and natural disasters. Prices for the products of our mining business have varied significantly in the past and could vary significantly in the future. See “— Price trends for products” below. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — We operate in cyclical industries, and any local or global downturn, whether or not primarily affecting the mining and/or steel industries, may have an adverse effect on our business, financial condition, results of operations and prospects.”
The steel industry is highly cyclical in nature because the industries in which steel customers operate are cyclical and sensitive to changes in general economic conditions. The demand for steel products thus generally correlates to macroeconomic fluctuations in the economies in which we sell our products, as well as in the global economy. The prices of our steel products are influenced by many factors, including demand, worldwide production capacity, capacity utilization rates, raw materials costs, exchange rates, trade barriers and improvements in steel-makingsteelmaking processes. Steel prices also typically follow trends in raw materials prices and increases in market prices for steel may lag behind increases in production costs, including raw materials.
Demand for steel, particularly long steel products, is closely tied to the construction industry in the markets in which we sell our products. The construction business in Russia, the principal market for our products, was severely impacted by the global financial crisis and the sharp economic slowdown in Russia. As a result of the critical role of steel in infrastructural and overall economic development, the steel industry tends to track macroeconomic factors such as GDP and industrial output.
Global real GDP grew by 2.8% in 2015, 2.4% in 2016 and 3.0% in 2017, 3.0% in 2018 and 2.4% in 2019, according to the World Bank. According to Rosstat, Russia recorded GDP decline of 3.7% in 2015 and 0.2% in 2016 and GDP growth of 1.5%1.8% in 2017. In 2015, the global economy was under pressure due to slowing growth2017, 2.5% in China, geopolitical tensions2018 and high levels of over-production of hydrocarbon raw materials and as a result of low oil prices. In 2016, there was a slight recovery of the global economy, the reduction of geopolitical tensions and the decline1.3% in oversupply reserves of crude oil which in turn helped to restore in commodity prices.2019. In 2017, the global economy experienced a cyclical recovery with acceleration of global economic activity and stabilization of commodity prices, however geopolitical tensions heightened. In 2018, the trends of 2017 continued with intensified competition of global economic systems and trade wars. In 2019, global economic growth slowed, while world trade tensions intensified.
Trade and competition
Mining products and many types of steel products are considered commodities and treated as fungible in the world markets. As such, we compete with steel producers and mining companies with operations in different
countries. The main competitive advantages that steel producers can secure are based on quality and production costs. Generally, steel producers in economically developed regions compete primarily based on quality of steel, while we and other steel producers in developing countries compete in the international market based primarily on price. With respect to our mining products, such as coal and iron ore, quality, production costs and transportation capabilities are key areas where companies seek a competitive advantage.
We benefit from import tariffs that Russia has in place for certain steel products. See “Risk Factors — Risks Relating to Our Business and Industry — We benefit from Russia’s tariffs and duties on imported steel, many of which have been reduced upon Russia’s WTO membership and may be eliminated in the future.”
Consolidation trends in the mining and steel industries
The mining industry has been severely impacted by high volatility of coal prices in 2017. The temporary factors continue to significantly influence the prices. Cyclone Debbie in Australia caused coal prices to peak in April, followed by the crash of prices next month. Chinese environmental restrictions and spot supply tightness emerged as a main drivers of coal prices toward the year end. Major coal producers focus more on organic growth and cost optimization rather than on consolidation opportunities.
The M&A opportunities in the steel industry remained idle during 2017. We expect a recovery in the steel industry M&A activity with stabilization of steel prices and increase of global steel demand. However, the Chinese government’s regulations of environmental issues and mining industry will still have a significant impact on consolidation trends in mining and steel sector globally.industries in 2019 were largely affected by trade tensions and geopolitical instability. Strategic investors seeking growth through acquisitions were predominant players in the M&A market. We believe that easing of global trade tensions could attract financial investors in mining and steel industries and reopen consolidation opportunities for strategic investors.
We, along with other Russian steel producers, tend to focus on vertical integration which ensures access to a stable supply of raw materials, particularly coking coal and iron ore. Our vertical integration helps us to better manage the effects of raw materials supply constraints and also provides us with an opportunity to capture higher margins in sales of our mining segment products to third parties.
Price trends for products
Coking coal and steam coal
During 2015, global metallurgical coal prices were under pressure as demand continued to decline and oversupply remained. According to CRU, quarterly contract price dropped from $117 per tonne (FOB Australia)
in the first quarter of 2015 to $89 per tonne (FOB Australia) in the fourth quarter of 2015. Spot prices declined from $106 per tonne (FOB Australia) in the first quarter of 2015 to $78 per tonne (FOB Australia) in the fourth quarter of 2015, according to CRU. The average contract price in 2015 was $102 per tonne, according to CRU. The average spot price in 2015 was $90 per tonne (FOB Australia), according to CRU. In thislow-price environment, many producers were operating at a loss. In 2016, metallurgical coal prices were extremely volatile, especially in the second half of the year. According to CRU, in 2016, the premium hard coking coal spot price increased four times from the beginning of the year and reached $310 per tonne (FOB Australia) in November. According to CRU, quarterly contract price rose from $81 per tonne (FOB Australia) in the first quarter of 2016 to $200 per tonne (FOB Australia) in the fourth quarter of 2016. The Chinese government’s actions to reduce coal supply were the primary driver of the metallurgical coal price rally in 2016. By the end of the year, the spot price had fallen by 25% from its peak level in November 2016 and amounted to $230 per tonne due to a reversal in Chinese coal supply policy. The government was attempting to inject supply into the market since October 2016 and this led to an improvement in the availability of domestic metallurgical coal, according to CRU. The average contract price in 2016 was $114 per tonne, 12% higher than the average contract price in 2015, according to CRU. The average spot price in 2016 was $140 per tonne (FOB Australia), 55% higher than the average spot price in 2015, according to CRU. In the second quarter of 2017, quarterly contract benchmark pricing shifted to a system that uses a three-month average of a daily spot price. This had been triggered by the extreme price volatility of metallurgical coal pricing after cyclone Debbie hit Queensland, Australia. According to CRU, hard coking coal spot prices jumped to $270 per tonne (FOB Australia) inmid-April, as Queensland coal shipments halted after cyclone Debbie. After the cyclone passed, almost all producers and all ports have been slowly resuming operations and prices returned to the previous level. In the third quarter of 2017, another price hike has been driven upwards by heated Chinese demand for seaborne cargoes amid a boom in steel production. In the end of the third quarter of 2017, prices started to decline due to Chinese government’s intention to decrease crude steel output in order to improve ecological situation in the winter months. However, during November and December 2017, prices were moving upwards again as port loading disruptions took place in Australia. The average contract price in 2017 was $206 per tonne, 81% higher than the average contract price in 2016, according to CRU. The average spot price in 2017 was $183 per tonne (FOB Australia), 31%according to CRU. In the beginning of 2018, spot metallurgical coal prices were in decline as loading disruptions in Australia eased significantly and due to weaker finished steel demand in China. Throughout the second and the third quarters of 2018, prices held in a relatively stable range. Premium hard coking coal spot prices (FOB Australia) rose to $221 per tonne in November 2018, up from $183 per tonne in August on the back of continued supply disturbances during the period. Particularly, coking coal availability was affected by the shutdown of Peabody’s North Goonyella mine in Queensland, according to CRU. The average contract price in 2018 was $207 per tonne (FOB Australia), just 0.5% higher than the average contract price in 2017, according to CRU. The spot price averaged $206 per tonne (FOB Australia) in 2018, which was 12.6% higher than the average spot price in 2016,2017, according to CRU.
In 2015, steamthe first half of 2019, spot metallurgical coal market was in oversupply, despite producers’ efforts to cut production. Chinese power generation and consumption growth had slowed significantly in 2015. According to Platts, in 2015 the spot price for steam coal was $59prices remained generally above $200 per tonne (5,500 NAR CFR China)(FOB Australia). The strength in January;prices was primarily attributed to tight seaborne supply. However, in the second half of 2019, weak demand fundamentals, increasing coal supply, weak steel margins and escalating trade tensions dragged seaborne coking coal prices down, and by the end of the year, it declined to $44 per tonne. The average price in 2015 was $52 per tonne (5,500 NAR CFR China), according to Platts. Inrestrictions on coal imports at Chinese ports further escalated the first five months of 2016, thedownward pressures on metallurgical coal prices. Thus, spot premium hard coking coal spot price for steam coal was generally stable fluctuating around $46 per tonne (5,500 NAR CFR China), but starting from June steam coal price beganfell significantly to rise sharply due to the Chinese government’s coal supply policy, according to Platts. As a result of decreased coal production in China steam coal price rose from $50 per tonne in June 2016 to $87 per tonne (5,500 NAR CFR China) in November 2016, but corrected to $75$134 per tonne in December 2016.2019, according to CRU. The average contract price in 20162019 was $59$185 per tonne (5,500 NAR CFR China)(FOB Australia), 13% higher10.6% lower than the average contract price in 2015,2018, according to Platts. CRU. The spot price averaged $178 per tonne (FOB Australia) in 2019, which was 13.6% lower than the average spot price in 2018, according to CRU.
In the first half of 2017, steam coal priceprices fluctuated around $75 per tonne (5,500 NAR CFR China) and then started to grow reaching $88 per tonne (5,500 NAR CFR China) in October 2017 due to very strong Chinese coal demand during the summer and reduced supply as the focus on improving coal mine safety in China intensified. The average price in 2017 was $79 per tonne (5,500 NAR CFR China), 34%according to Platts. According to Platts, in the first four months of 2018, steam coal spot prices fell from $97 per tonne to $78 per tonne (5,500 NAR CFR China) due to decreased coal consumption as the winter season came to an end. Prices increased again in June 2018, up to $90 per tonne (5,500 NAR CFR China), due to strong coal demand during the summer peak season. In the second half of 2018, import prices for steam coal in China were generally weak and went down to $71 per tonne (5,500 NAR CFR China) due to a mild winter in China and stringent import restrictions at the end of the year. The average price in 2018 was $82 per tonne (5,500 NAR CFR China), 3.8% higher than the average price in 2016,2017, according to Platts. Steam coal spot prices fell from $71 per tonne (5,500 NAR CFR China) in January 2019 to $63 per tonne (5,500 NAR CFR China) in June 2019, according to Platts. In the second half of 2019, steam coal spot prices fluctuated around $64 per tonne (5,500 NAR CFR China), according to Platts. Such price dynamics were caused by multiple factors, such as mild weather, a slowdown in Chinese power demand growth, coalphase-out policies in the EU, combined with lower gas prices. The average price in 2019 was $66 per tonne (5,500 NAR CFR China), 19.5% lower than the average price in 2018, according to Platts.
Iron ore
In 2015, a lot of new iron ore capacity came on stream which together with a reduction of steel production in China had led to lower prices. Iron ore spot price declined from $68 per dry metric tonne (62% Fe, CFR China) in January 2015 to $40 per dry metric tonne in December 2015, according to MMI. The average spot price in 2015 was $56 per dry metric tonne, according to MMI. Starting from January 2016, there was a reversal in iron ore spot price trend. During 2016, iron ore spot prices were generally rising with minor downward corrections inMay-June and September. The iron ore spot price increased from a low of $42 per dry metric tonne
(62% Fe, CFR China) in January to a high of $80 per dry metric tonne in December, according to MMI. Strong Chinese demand for imported iron ore which hit anall-time high in 2016 was the main reason of the price increase. The average spot price in 2016 was $58 per dry metric tonne which was 4% higher than the average price in 2015, according to MMI. Strongstrong Chinese steel sector supported iron ore prices in 2017 and the average spot price reached $71 per dry metric tonne (62% Fe, CFR China), according to MMI. Iron ore spot prices slightly decreased in 2018 as a result of slower iron ore imports in China and growing global supply of iron ore. The average spot price in 2018 was $69 per dry metric tonne (62% Fe, CFR China) which was 22% higher3% lower than the average price in 2016,2017, according to MMI. Throughout the yearIron ore spot prices fluctuated from $54rose sharply in 2019 due to global supply shortage after Vale tailings dam failure in Brazil in January 2019. The average spot price in 2019 was $93 per dry metric tonne (62% Fe, CFR China), which was 35% higher than the average price in 2018, according to MMI.
Coke
In 2015, coke production overshoot demand, Chinese export volume has increased, exacerbating oversupply and displacing market share of other coke producing countries in international markets, thus pressuring prices for coke. As a result2017, coke prices declinedwere on the rise: prices increased from $177$270 per tonne (FOB China basis) in the first quarter of 2017 to $123$330 per tonne (FOB China basis) in the fourth quarter of 2017, according to CRU.Platts. In 2017, margins on steel products in China hit multi-year highs, and to take advantages of high prices, steel mills were restocking raw materials in order to ramp up blast furnace production. The average domestic coke price in 20152017 was 10,892 rublesRUB 17,902 per tonne (including VAT, FCA basis), according to Metal Expert. Price growth in the domestic coke market was due to depreciation of Russian ruble, higher coking coal prices and strong demand from Ukraine. In 2016,2018, the world coke price showed almost the same dynamics as coking coal prices. According to CRU, coke prices increased from $113$351 per tonne (FOB China basis) in the first quarter of the year to $307$366 per tonne (FOB China basis) in the fourth quarter of the year. According2018, according to CRU, such sharp rise of the coke pricePlatts. There was driven largely by panic buying by steel producers globally. Initially, tightnessa recovery in the market was created following implementation of the ‘276 working days’ policy atdemand from two main markets for Chinese coal mines that reduced coal production.coke: India and Japan. The average domestic coke price in 20162018 was 12,022 rublesRUB 17,681 per tonne (including VAT, FCA basis), 10% higherjust 1% lower than the average price in 2015,2017, according to Metal Expert. Price growth in the domestic coke market was due to sharp rise of coking coal prices in the second half of the year in Russia, which led to costs increase of coke producers and increasedIn 2019, coke prices on export markets. In 2017, coke prices were on the rise: prices increaseddeclined from $278$335 per tonne (FOB China basis) in the first quarter of 20172019 to $320$276 per tonne (FOB China basis) in the third quarter of 2017, according to CRU. Particularly, in the second quarter of 2017, margins on steel products in China have hit multi-year highs; to take advantages of high prices, steel mills have been restocking raw materials in order to ramp up blast furnace production, according to CRU. In the fourth quarter of 2017,2019, according to Platts. The decline in coke prices was in China reached $315 per tonne (FOB China basis), according to CRU estimates.line with lower coking coal prices in 2019. The average domestic coke price in 20172019 was 17,902 rublesRUB 17,284 per tonne (including VAT, FCA basis), which was 49% higher2% lower than the average price in 2016,2018, according to Metal Expert. Sharp price rise was due to higher domestic coking coal prices.
Steel
In 2015, the Russian domestic price for rebar increased to 25,038 rubles (+4.6%year-on-year) per tonne mostly as a result of the growth in the exchange rate. The average export price for square billets declined to $328(-31.8%year-on-year) per tonne as a result of decreased oil and scrap prices, low demand and increased competition on the background of China’s exports growth, according to Metal-Courier. In 2016, the Russian domestic price for rebar increased to 30,177 rubles (+20.5%year-on-year) per tonne due to further ruble devaluation, strong export markets and limited supply in the second and fourth quarters. The average export price for square billets remained almost unchanged at $328 (+0.1%year-on-year) per tonne, according to Metal-Courier. In 2017, the Russian domestic price for rebar increased to RUB 30,603 rubles (+1.4%year-on-year) per tonne because of strong export markets of square billets, according to Metal-Courier. The average export price for square billets increased to $436 (+33.1%year-on-year) per tonne as a result of upturned export scrap market and credit stimulation in China which pushed prices for semi-finished products, according to Metal-Courier.
Ferrosilicon
In 2018, the beginning of 2015, theRussian domestic price of ferrosilicon continuedfor rebar increased to fall. In May 2015, the price decline has stopped at $1,242RUB 36,513 (+19.3%year-on-year) per tonne (75% Si, CIF Japan),because of strong export markets of square billets and scrap, according to TEX. After a relatively stable position in June-August, ferrosilicon prices resumed falling. In December 2015, prices dropped to $1,156 per tonne (75% Si, CIFMetal-Courier. The average export price for square
Japan), accordingbillets increased to TEX. The average price for ferrosilicon in 2015 was $1,239 per tonne (75% Si, CIF Japan), according to TEX. In 2016, from January to September, the average price for ferrosilicon had not been subject to significant fluctuations and was within the range of$491 (+12.5%$1,155-1,195year-on-year) per tonne (75% Si, CIF Japan).as a result of upturned export scrap market in the first half of the year, which was due to rising raw material costs from a lack of electrodes, as well as high Chinese export prices for billet and long products during the first and second quarters of the year, according to Metal-Courier. In October and November,2019, the averageRussian domestic price for ferrosilicon showed a sharp increase and amountedrebar increased to $1,285RUB 36,588 (+0.3%year-on-year) per tonne (75% Si, CIF Japan). Quotations in the Japanese market increased as thedespite decreasing export markets of square billets and scrap, according to Metal-Courier. The average export price rose in China. In December, the price stopped rising and amountedfor square billets decreased to $1,260$410(-16.5%year-on-year) per tonne, (75% Si, CIF Japan). The average price for ferrosilicon in 2016 was $1,193 per tonne (75% Si, CIF Japan), a decrease of 4% compared to 2015, according to TEX. Metal Expert. The decrease was attributable to downward export scrap market during 2019, as a result of slowdown in Turkish economy and metallurgical sector in particular.
Ferrosilicon
The first half of 2017 was relatively stable, monthly price fluctuations did not exceed 7%. The price range was at the level of$1,100-1,200 per tonne (75% Si, CIF Japan), according to TEX. In the second half of 2017, due to the Chinese government’s introduction of production restrictions in the metallurgical, coal and ferroalloy industries, ferrosilicon prices in the Asia region sharply increased reaching $2,200 per tonne (75% Si, CIF Japan) by December 2017, according to TEX. The average price for ferrosilicon in 2017 was $1,362 per tonne (75% Si, CIF Japan), according to TEX. In early 2018, ferrosilicon prices began to decline following a sharp rise at the end of 2017. In April 2018, the price dropped to $1,358 per tonne (75% Si, CIF Japan), according to TEX. At the end of April 2018, the Ministry of Ecology and Environment of China suspended operation of silica stone mines resulting in a decrease of silicon in the market and an increase in the price of ferrosilicon up to $1,459 per tonne (75% Si, CIF Japan) in May, according to TEX. From the second quarter of 2018 until the end of the year, there were no significant events, and prices gradually decreased. According to TEX, the price reached $1,280 per tonne (75% Si, CIF Japan) in December 2018. The average price for ferrosilicon in 2018 was $1,408 per tonne (75% Si, CIF Japan), an increase of 14%3.3% compared to 2016,2017, according to TEX. In 2019, volatility in the ferrosilicon market was low due to a decrease in steel production. In 2019, global steel production (excluding China) decreased by 1.7% compared to 2018, while steel production in China increased by 8.3%, according to the World Steel Association. The market, after increases in prices in the period of late 2017-early 2018, has stabilized. The average price was in the range of$1,165-1,225 per tonne (75% Si, CIF Japan), according to TEX. In July 2019, a new ferrosilicon plant was launched in Kazakhstan, resulting in increased competition in the global ferrosilicon market, according to Metal Expert. The average price for ferrosilicon in 2019 was $1,185 per tonne (75% Si, CIF Japan), which is 18.8% lower than in 2018, according to TEX.
Freight costs
In 2017,2019, the dry bulk market showedwas sustained by stronger performances by the Capesize sector as the smaller, geared tonnage sectors faced stagnant or negative trajectories. This was mostly due to China’s iron ore imports rising 0.47% in 2019 to hover just below theirall-time annual peak, fueled by strong demand at steel mills and a sustainablesecond-half recovery to healthier levels whenin shipments from big miners after disruptions earlier in the amount ofnew-building vessels gradually decreased and demand for commodities was on the rise. That resulted in increasing of freight rates.year. The largest increase in the dry bulk sector came from the Capesize sector, where the average time charter rate increased from $7,388$16,528 per day in 20162018 to $15,129$18,024 per day in 2017.2019. The average Supramax rate was $9,948 per day in 2019 compared to $11,486 per day in 2018. The average Panamax rate was $9,766$11,111 per day in 20172019 compared to $5,562$11,653 per day in 2016. The average rate for Supramax vessels in 2017 was $9,345 per day compared to $6,236 per day in 2016.2018. The average rate for Handysize vessels in 20172019 was $7,636$7,188 per day compared to $5,214$8,700 per day in 2016.2018. In 2019, the sector achieved 4.1% net fleet growth.
Exchange rates
Our products are typically priced in rubles for Russian and the CIS sales and in U.S. dollars or euros for international sales. Our direct costs, including raw materials, labor and transportation costs are largely incurred in rubles and other local currencies, while other costs, such as interest expenses, are incurred in rubles, euros and U.S. dollars. The mix of our revenues and costs is such that a depreciation in real terms of the ruble against the U.S. dollar tends to result in a decrease in our costs relative to our revenues, while an appreciation of the ruble against the U.S. dollar in real terms tends to result in an increase in our costs relative to our revenues.
Application of IFRS 16 “Leases”
In January 2016, the International Accounting Standards Board issued IFRS 16, “Leases”, which sets out a new model for lease accounting replacing IAS 17. IFRS 16 introduces new or amended requirements with respect to lease accounting. It introduces significant changes to lessee accounting by removing the distinction between operating and finance leases and requiring the recognition of aright-of-use asset and a lease liability at the lease commencement for all leases, except for short-term leases and leases of low value assets. IFRS 16 is effective for accounting periods beginning on or after January 1, 2019, and is to be applied retrospectively.
We have applied IFRS 16 since January 1, 2019 retrospectively with a cumulative effect recognized as an adjustment to the opening balance of equity at the date of initial application. Upon transition to IFRS 16, we recognized an additional RUB 2,698 million ofright-of-use assets and 3,259 million of lease liabilities, recognizing the difference in equity. The nature and the effect of the changes in accounting policies resulting from the adoption of IFRS 16 are described in note 3(x) to the consolidated financial statements.
Tax
Any changes in tax and tax liabilities canaffect our results of operations and financial condition. However, we believe that we have paid or accrued all taxes that are applicable. Where uncertainty exists, we have accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. We accrued RUB 1,535 million, RUB 583 million and RUB 578 million of tax claims other than income tax that management believes are probable as of December 31, 2019, 2018 and 2017, respectively. In addition, income tax claims that management believes are probable were accrued. See note 19 to the consolidated financial statements.
Results of Operations
The following table sets forth our consolidated statement of profit (loss) data for the years ended December 31, 2017, 20162019, 2018 and 2015.2017.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
| Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | |||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||
Revenue | 299,113 | 100.0% | 276,009 | 100.0% | 253,141 | 100.0% | ||||||||||||||||||
Revenue from contracts with customers | 296,567 | 100.0% | 312,574 | 100.0% | 299,113 | 100.0% | ||||||||||||||||||
Cost of sales | (160,356) | (53.6%) | (146,322) | (53.0%) | (151,334) | (59.8%) | (187,857) | (63.3%) | (177,756) | (56.9%) | (160,356) | (53.6%) | ||||||||||||
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Gross profit | 138,757 | 46.4% | 129,687 | 47.0% | 101,807 | 40.2% | 108,710 | 36.7% | 134,818 | 43.1% | 138,757 | 46.4% | ||||||||||||
Total selling, distribution and operating income and (expenses), net | (81,590) | (27.3%) | (86,997) | (31.5%) | (77,555) | (30.6%) | (77,212) | (26.0%) | (85,038) | (27.2%) | (81,590) | (27.3%) | ||||||||||||
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Operating profit | 57,167 | 19.1% | 42,690 | 15.5% | 24,252 | 9.6% | 31,498 | 10.6% | 49,780 | 15.9% | 57,167 | 19.1% | ||||||||||||
Total other income and (expense), net | (41,447) | (13.9%) | (28,539) | (10.3%) | (131,380) | (51.9%) | (19,226) | (6.5%) | (33,563) | (10.7%) | (41,447) | (13.9%) | ||||||||||||
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Profit (loss) before tax from continuing operations | 15,720 | 5.3% | 14,151 | 5.1% | (107,128) | (42.3%) | ||||||||||||||||||
Profit before tax from continuing operations | 12,272 | 4.1% | 16,217 | 5.2% | 15,720 | 5.3% | ||||||||||||||||||
Income tax expense | (3,150) | (1.1%) | (4,893) | (1.8%) | (8,322) | (3.3%) | (7,987) | (2.7%) | (2,681) | (0.9%) | (3,150) | (1.1%) | ||||||||||||
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Profit (loss) for the year from continuing operations | 12,570 | 4.2% | 9,258 | 3.4% | (115,450) | (45.6%) | ||||||||||||||||||
(Loss) profit after tax for the year from discontinued operations, net | — | 0.0% | (426) | (0.2%) | 822 | 0.3% | ||||||||||||||||||
Profit for the period from continuing operations | 4,285 | 1.4% | 13,536 | 4.3% | 12,570 | 4.2% | ||||||||||||||||||
Loss after tax for the period from discontinued operations, net | — | 0.0% | — | 0.0% | — | 0.0% | ||||||||||||||||||
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Profit (loss) for the year | 12,570 | 4.2% | 8,832 | 3.2% | (114,628) | (45.3%) | ||||||||||||||||||
Profit for the period | 4,285 | 1.4% | 13,536 | 4.3% | 12,570 | 4.2% | ||||||||||||||||||
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Less: profit attributable tonon-controlling interests | 1,013 | 0.3% | 1,706 | 0.6% | 535 | 0.2% | 1,876 | 0.6% | 908 | 0.3% | 1,013 | 0.3% | ||||||||||||
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Profit (loss) attributable to equity shareholders of Mechel PAO | 11,557 | 3.9% | 7,126 | 2.6% | (115,163) | (45.5%) | ||||||||||||||||||
Profit attributable to equity shareholders of Mechel PAO | 2,409 | 0.8% | 12,628 | 4.0% | 11,557 | 3.9% | ||||||||||||||||||
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Year ended December 31, 20172019 compared to year ended December 31, 20162018
Revenues
Consolidated revenues increaseddecreased by RUB 23,10416,007 million, or 8.4%5.1%, to RUB 299,113296,567 million in the year ended December 31, 20172019 from RUB 276,009312,574 million in the year ended December 31, 2016.2018.
The sales increasedecrease was due to an increasea decrease in sales prices across our major segments.
The following table sets forth our net revenues by segment, including a breakdown by sales to third parties and other segments.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
Revenues by Segment | 2017 | 2016 | 2019 | 2018 | ||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||
Mining segment | ||||||||||||||||
To third parties | 100,129 | 89,647 | 92,996 | 96,882 | ||||||||||||
To power segment | 921 | 1,370 | 1,020 | 1,030 | ||||||||||||
To steel segment | 41,365 | 30,537 | 36,690 | 36,519 | ||||||||||||
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| |||||||||||||
Total | 142,415 | 121,554 | 130,706 | 134,431 | ||||||||||||
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Steel segment | ||||||||||||||||
To third parties | 172,760 | 161,639 | 174,850 | 187,918 | ||||||||||||
To power segment | 5,917 | 5,693 | 4,249 | 4,132 | ||||||||||||
To mining segment | 1,705 | 1,562 | 1,858 | 1,733 | ||||||||||||
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Total | 180,382 | 168,893 | 180,957 | 193,783 | ||||||||||||
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Power segment | ||||||||||||||||
To third parties | 26,224 | 24,723 | 28,721 | 27,774 | ||||||||||||
To steel segment | 12,387 | 11,709 | 10,603 | 10,829 | ||||||||||||
To mining segment | 3,951 | 4,193 | 5,003 | 4,642 | ||||||||||||
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Total | 42,562 | 40,626 | 44,327 | 43,245 | ||||||||||||
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Eliminations | 66,246 | 55,064 | 59,423 | 58,885 | ||||||||||||
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Consolidated revenues | 299,113 | 276,009 | 296,567 | 312,574 | ||||||||||||
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% from mining segment | 33.5 | % | 32.5 | % | 31.3 | % | 31.0 | % | ||||||||
% from steel segment | 57.7 | % | 58.5 | % | 59.0 | % | 60.1 | % | ||||||||
% from power segment | 8.8 | % | 9.0 | % | 9.7 | % | 8.9 | % | ||||||||
Mining segment
Our mining segment revenues increaseddecreased by RUB 20,8613,725 million, or 17.2%2.8%, to RUB 142,415130,706 million in the year ended December 31, 20172019 from RUB 121,554134,431 million in the year ended December 31, 2016.2018.
Coking coal concentrate sales to third parties increaseddecreased by RUB 4,9125,670 million, or 12.7%13.0%, to RUB 43,65637,963 million in the year ended December 31, 20172019 from RUB 38,74443,633 million in the year ended December 31, 2016,2018, as a result of an increasea decrease in sales prices of RUB 11,5256,133 million that was partially offset by a decreasean increase in sales volumes of RUB 6,613463 million. The average contract price in 20172019 was $206$185 per tonne 81% higher(FOB Australia), 10.6% lower than the average contract price in 2016,2018, according to CRU. The average spot price in 2017 was $183averaged $178 per tonne (FOB Australia), 31% higher in 2019, which was 13.6% lower than the average spot price in 2016,2018, according to CRU.
The volume of coking coal concentrate sold to third parties decreasedincreased by 98745 thousand tonnes, or 17.1%1.1%, to 4,7974,303 thousand tonnes in the year ended December 31, 20172019 from 5,7844,258 thousand tonnes in the year ended December 31, 2016.2018. The decreaseincrease in sales volumes of coking coal concentrate was mainly due to the decreasedincreased production of coking coal.coal at Southern Kuzbass Coal Company.
The volume of coking coal concentrate sold to third parties decreased both at Yakutugol and increased at Southern Kuzbass Coal Company. Yakutugol’s coking coal concentrate sales volumes decreased by 1,011789 thousand tonnes, or 19.8%24.6%, to 4,1092,419 thousand tonnes in the year ended December 31, 20172019 from 5,1203,208 thousand tonnes in the year ended December 31, 20162018 due to lowerdecrease in production and reduction in coking coal output as a result of unfavorable geological conditions.concentrate yield. Southern Kuzbass Coal Company’s coking coal concentrate sales volumes decreased by
159increased by 960 thousand tonnes, or 37.8%157.9%, to 2621,568 thousand tonnes in the year ended December 31, 20172019 from 421608 thousand tonnes in the year ended December 31, 20162018 due to decreaseincrease in production.
Coke sales to third parties increased by RUB 2,0373,952 million, or 21.8%35.2%, to RUB 11,37915,196 million in the year ended December 31, 20172019 from RUB 9,34211,244 million in the year ended December 31, 2016,2018, as a result of an increase in sales pricesvolumes of RUB 3,3234,013 million that was partially offset by a decrease in sales volumesprices of RUB 1,28661 million. In 2017,2019, coke prices increaseddeclined from $278$335 per tonne (FOB China basis) in the first quarter of 20172019 to $315$276 per tonne (FOB China basis) in the fourth quarter of 2017,2019, according to CRU.Platts. The average domestic coke price in 20172019 was 17,902 rublesRUB 17,284 per tonne (including VAT, FCA basis), which was 49% higher2% lower than the average price in 2016,2018, according to Metal Expert.
Coke supplied to the steel segment increaseddecreased by RUB 6,1105,354 million, or 29.0%21.1%, to RUB 27,19620,066 million in the year ended December 31, 20172019 from RUB 21,08625,420 million in the year ended December 31, 2016.2018. The increasedecrease was due to an increase in sales prices of RUB 6,589 million that was partially offset by a decrease in sales volumes of RUB 4792,392 million and a decrease in sales prices of RUB 2,962 million. Coke sales volumes from Mechel Coke to Chelyabinsk Metallurgical Plant slightly decreased by 24161 thousand tonnes, or 1.3%9.3%, to 1,8971,566 thousand tonnes in the year ended December 31, 20172019 from 1,9211,727 thousand tonnes in the year ended December 31, 2016.2018.
Chemical products sales to third parties increaseddecreased by RUB 380187 million, or 19.1%6.3%, to RUB 2,3682,774 million in the year ended December 31, 20172019 from RUB 1,9882,961 million in the year ended December 31, 2016,2018, mainly as a result of an increasea decrease in sales prices.
Anthracite and PCI sales to third parties increaseddecreased by RUB 2,7003,920 million, or 14.4%19.9%, to RUB 21,43715,767 million in the year ended December 31, 20172019 from RUB 18,73719,687 million in the year ended December 31, 2016,2018, as a result of an increase in sales prices of RUB 4,335 million that was partially offset by a decrease in sales volumes of RUB 1,6352,147 million and a decrease in sales prices of RUB 1,773 million. The decrease in sales volumes of anthracite and PCI was due to drop in coal extraction as a result of a decrease in transportation capacity.extraction.
Steam coal sales to third parties increased by RUB 8602,124 million, or 6.8%21.4%, to RUB 13,44712,059 million in the year ended December 31, 20172019 from RUB 12,5879,935 million in the year ended December 31, 2016,2018, as a result of an increase in sales volumes of RUB 1,765 million and an increase in sales prices of RUB 1,284 million that359 million. The increase in third-party sales volumes was partially offset by adue to increase in production. The increase in sales prices was mainly due to an increase in the average exchange rate of the U.S. dollar to the Russian ruble, despite the decrease in sales volumes of RUB 424 million. In the first half of 2017,global prices for steam coal price fluctuated around $75 per tonne (5,500 NAR CFR China) and then started to grow reaching $88 per tonne (5,500 NAR CFR China) in October 2017 due to strong Chinese coal demand during the summer. The average price in 2017 was $79 per tonne (5,500 NAR CFR China), 34% higher than the average price in 2016, according to Platts.coal.
Steam coal supplied to the power segment decreasedincreased by RUB 17621 million, or 50.3%13.0%, to RUB 174184 million in the year ended December 31, 20172019 from RUB 350163 million in the year ended December 31, 2016,2018, as a result of a decreasean increase in sales volumes. Sales of steam coal to the power segment companies decreasedSouthern Kuzbass Power Plant increased by 18736 thousand tonnes, or 51.6%30.2%, to 175156 thousand tonnes in the year ended December 31, 20172019 from 362120 thousand tonnes in the year ended December 31, 20162018 due to steam coal production decrease.increase.
Sales of iron ore concentrate to third parties increased by RUB 94340 million, or 74.6%40.5%, to RUB 2201,179 million in the year ended December 31, 20172019 from RUB 126839 million in the year ended December 31, 2016,2018, as a result of an increase in sales volumes of RUB 19317 million and an increase in sales prices of RUB 7523 million. Strong Chinese steel sector supported ironIron ore spot prices rose sharply in 2017 and the2019 due to global supply shortage after Vale tailings dam failure in Brazil in January 2019. The average spot price reached $71in 2019 was $93 per dry metric tonne (62% Fe, CFR China) which was 22%35% higher than the average price in 2016, according to MMI. Throughout the year prices fluctuated from $54 to $93 per dry metric tonne (62% Fe, CFR China),2018, according to MMI.
Supplies of iron ore concentrate to the steel segment increased by RUB 2,5765,387 million, or 30.5%61.3%, to RUB 11,02014,169 million in the year ended December 31, 20172019 from RUB 8,4448,782 million in the year ended December 31, 2016,2018, as a result of an increase in sales volumes of RUB 2,687 million and an increase in sales prices of RUB 3,320 million that was partially offset by a decrease in sales volumes of RUB 7442,700 million. Sales volumes decreasedincreased due to decreasean increase in production.
Excluding intersegment sales, export sales were stable at 77.8%80.2% of mining segment sales in the year ended December 31, 2017,2019, compared to 74.6%79.0% in the year ended December 31, 2016.2018.
Steel segment
Our steel segment revenues increaseddecreased by RUB 11,48912,826 million, or 6.8%6.6%, to RUB 180,382180,957 million in the year ended December 31, 20172019 from RUB 168,893193,783 million in the year ended December 31, 2016.2018.
Semi-finished products sales decreasedincreased by RUB 2,94283 million, or 85.7%153.7%, to RUB 492137 million in the year ended December 31, 20172019 from RUB 3,43454 million in the year ended December 31, 2016,2018, as a result of an increase of RUB 120 million in sales volumes that was partially offset by a decrease of RUB 3,075 million in sales volumes and an increase of RUB 13337 million in sales prices. The decreaseincrease in third-party sales volumes was due to increase in consumptionsingle sales to European customers as most of the produced volumes continued to be consumed within our steel segment related to expansion of the universal rolling mill’s production.segment. In 2017,2019, the annual average domestic price for billets (including VAT, FCA basis) was 25,780 rublesRUB 57,517 per tonne, 18.1% higher44.7% lower than the average domestic price in 2016.2018.
Other long products sales increaseddecreased by RUB 9,632826 million, or 24.6%11.4%, to RUB 48,73150,046 million in the year ended December 31, 20172019 from RUB 39,09950,872 million in the year ended December 31, 2016,2018, as a result of an increasea decrease in sales volumes of RUB 5,1331,711 million that was partially offset by an increase in sales prices and an increase of RUB 4,499 million in sales volumes.885 million. The increase in sales prices was due to increase in purchase prices for steel-makingsteelmaking raw materials (iron ore feed, coke, etc.)including pellets). Sales volumes increaseddecreased due to strengthening demanda decline in the Russian market and increase in the rangeproduction as a result of the universal rolling mill’s products.equipment overhaul.
Other flat products sales increaseddecreased by RUB 4,5842,058 million, or 27.4%9.6%, to RUB 21,30719,346 million in the year ended December 31, 20172019 from RUB 16,72321,404 million in the year ended December 31, 2016,2018, as a result of an increasea decrease of RUB 1,6362,024 million in sales pricesvolumes and an increase of RUB 2,94834 million in sales volumes. In 2017, the annual average price for flat steel products (including VAT, FCA basis) was 37,757 rubles per tonne, 4.9% higher than the average price in 2016.prices. The sales volume increasedvolumes decreased mainly due to strengtheningtemporary suspension of consumer demand in the Russian market.production as a result of equipment repairs.
Wire sales increaseddecreased by RUB 1,9682,172 million, or 12.7%11.1%, to RUB 17,49817,418 million in the year ended December 31, 20172019 from RUB 15,53019,590 million in the year ended December 31, 2016,2018, as a result of an increase of RUB 2,540 million in sales prices that was partially offset by a decrease of RUB 5721,986 million in sales volumes.volumes and RUB 186 million in sales prices. The increasedecrease in sales prices was driven by strong domestic demand and increasedue to a decrease in the prices of wire rod used as the main input for wire production. Sales volumes declined due to decreaselower demand in production as a resultdomestic market and aggravation of equipment repairs.price competition.
Rebar sales decreased by RUB 2,4695,732 million, or 5.5%11.9%, to RUB 42,73542,268 million in the year ended December 31, 20172019 from RUB 45,20448,000 million in the year ended December 31, 2016,2018, as a result of a decrease of RUB 4,9104,913 million in sales volumes and RUB 819 million in sales prices. Sales volumes decreased due to redirection of production in favor of high value-added products. In 2019, the annual average domestic price for rebar was RUB 31,937 per tonne, 2.0% lower than the average domestic price in 2018.
Steel pipes sales increased by RUB 51 million, or 1.6%, to RUB 3,281 million in the year ended December 31, 2019 from RUB 3,230 million in the year ended December 31, 2018, as a result of an increase of RUB 169 million in sales volumes that was partially offset by a decrease of RUB 118 million in sales prices.
Pig iron sales decreased by RUB 57 million, or 42.9%, to RUB 76 million in the year ended December 31, 2019 from RUB 133 million in the year ended December 31, 2018, as a result of a decrease of RUB 52 million in sales volumes and RUB 5 million in sales prices. Pig iron third-party sales volumes depend on consumption within our steel segment.
Stampings sales decreased by RUB 266 million, or 2.2%, to RUB 11,605 million in the year ended December 31, 2019 from RUB 11,871 million in the year ended December 31, 2018, as a result of a decrease of RUB 2,937 million in sales volumes that was partially offset by an increase of RUB 2,4412,671 million in sales prices. SalesThe decrease in sales volumes decreasedwas due to highincreased competition between domestic producers for construction sector. In 2017,in the Russian domestic price for rebar increased mainly due to increase in purchase prices for raw materials.market.
Steel pipes
Ferrosilicon sales decreased by RUB 553698 million, or 16.8%17.8%, to RUB 2,7333,229 million in the year ended December 31, 20172019 from RUB 3,2863,927 million in the year ended December 31, 2016,2018, as a result of a decrease of RUB 934702 million in sales volumesprices that was slightly offset by an increase of RUB 3814 million in sales prices.volumes. The price increased mainlydecrease in sales prices was due to an increasereduction of quotation in purchase pricesthe world market. The average price for raw materials. The sales volume decreased dueferrosilicon in 2019 was $1,185 per tonne (75% Si, CIF Japan), which is 18.8% lower than in 2018, according to shiftingTEX.
Sales of our focus to high value-added products.
Pig iron salesnon-core products and services decreased by RUB 5651,017 million, or 83.2%16.5%, to RUB 1145,160 million in the year ended December 31, 20172019 from RUB 6796,177 million in the year ended December 31, 2016, as a result2018.
Excluding intersegment sales, export sales were 12.7% of a decrease of RUB 604 millionsteel segment sales in sales volumes and an increase of RUB 39 millionthe year ended December 31, 2019, compared to 14.6% in sales prices. The decrease in third-party sales volumes was due to the increase in consumption within our steel segment.
Stampings salesOur power segment revenues increased by RUB 9111,082 million, or 12.6%2.5%, to RUB 8,14644,327 million in the year ended December 31, 20172019 from RUB 7,23543,245 million in the year ended December 31, 2016,2018.
Electricity sales to third parties increased by RUB 956 million, or 3.7%, to RUB 26,965 million in the year ended December 31, 2019 from RUB 26,009 million in the year ended December 31, 2018, as a result of an increase of RUB 2,0221,222 million in sales volumes that was partially offset by a decrease of RUB 1,111 million in sales prices. The decrease in sales prices was driven by the decrease in domestic and export prices during 2017. The increase in sales volumes was due to ongoing recovery of demand from the key consuming industries (engineering and transport industries).
Ferrosilicon sales decreased by RUB 561 million, or 16.7%, to RUB 2,807 million in the year ended December 31, 2017 from RUB 3,368 million in the year ended December 31, 2016, as a result of a decrease of RUB 661 million in sales volumes and an increase of RUB 100 million in sales prices. The increase in sales prices was driven by the growth of quotation in the Asian market. The average price for ferrosilicon in 2017 was $1,362 per tonne (75% Si, CIF Japan), an increase of 14% compared to 2016, according to TEX. The decrease in sales volumes was due to temporary suspension of production as a result of furnaces repair at Bratsk Ferroalloy Plant.
Sales ofnon-core products and services increased by RUB 681 million, or 10.0%, to RUB 7,516 million in the year ended December 31, 2017 from RUB 6,835 million in the year ended December 31, 2016, due to ongoing overall revival of domestic market.
Excluding intersegment sales, export sales were 12.1% of steel segment sales in the year ended December 31, 2017, compared to 14.0% in the year ended December 31, 2016.
Power segment
Our power segment revenues increased by RUB 1,937 million, or 4.8%, to RUB 42,562 million in the year ended December 31, 2017 from RUB 40,625 million in the year ended December 31, 2016.
Electricity sales to third parties increased by RUB 1,770 million, or 7.9%, to RUB 24,297 million in the year ended December 31, 2017 from RUB 22,527 million in the year ended December 31, 2016, as a result of an increase of RUB 251 million in sales volumes and RUB 1,519267 million in sales prices.
Other revenue, which consists mostly of capacity and heat energy, slightly decreased by RUB 2699 million, or 12.2%0.5%, to RUB 1,9271,756 million in the year ended December 31, 20172019 from RUB 2,1961,765 million in the year ended December 31, 2016, due to a decrease in capacity sales volumes of Southern Kuzbass Power Plant.2018.
Intersegment sales increased by RUB 435135 million, or 2.7%0.9%, to RUB 16,33815,606 million in the year ended December 31, 20172019 from RUB 15,90315,471 million in the year ended December 31, 2016,2018, mainly as a result of an increase in electricity tariffs.
Cost of sales and gross profit
The consolidated cost of sales was 53.6%63.3% of consolidated revenues in the year ended December 31, 2017,2019, as compared to 53.0%56.9% of consolidated revenues in the year ended December 31, 2016,2018, resulting in a decrease in consolidated gross profit to 46.4%36.7% in the year ended December 31, 20172019 from 47.0%43.1% for the year ended December 31, 2016.2018. Cost of sales primarily consists of costs relating to raw materials (including products purchased for resale), direct payroll, depreciation and energy. The table below sets forth cost of sales and gross profit by segment for the years ended December 31, 20172019 and 2016,2018, including as a percentage of segment revenues.
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||
Cost of Sales and Gross Profit by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||
Mining segment | ||||||||||||||||||||||||||||||||
Cost of sales | 48,952 | 34.4 | % | 45,040 | 37.1 | % | 62,554 | 47.9 | % | 57,232 | 42.6 | % | ||||||||||||||||||||
Gross profit | 93,464 | 65.6 | % | 76,515 | 62.9 | % | 68,152 | 52.1 | % | 77,199 | 57.4 | % | ||||||||||||||||||||
Steel segment | ||||||||||||||||||||||||||||||||
Cost of sales | 146,369 | 81.1 | % | 126,745 | 75.0 | % | 153,433 | 84.8 | % | 149,349 | 77.1 | % | ||||||||||||||||||||
Gross profit | 34,013 | 18.9 | % | 42,148 | 25.0 | % | 27,525 | 15.2 | % | 44,433 | 22.9 | % | ||||||||||||||||||||
Power segment | ||||||||||||||||||||||||||||||||
Cost of sales | 29,838 | 70.1 | % | 29,047 | 71.5 | % | 31,137 | 70.2 | % | 30,674 | 70.9 | % | ||||||||||||||||||||
Gross profit | 12,724 | 29.9 | % | 11,578 | 28.5 | % | 13,190 | 29.8 | % | 12,571 | 29.1 | % | ||||||||||||||||||||
Mining segment
Mining segment cost of sales increased by RUB 3,9125,322 million, or 8.7%9.3%, to RUB 48,95262,554 million in the year ended December 31, 20172019 from RUB 45,04057,232 million in the year ended December 31, 2016.2018. The gross profit percentage increaseddecreased to 65.6%52.1% in the year ended December 31, 20172019 compared to 62.9%57.4% in the year ended December 31, 2016,2018, mainly due to the increase in selling prices caused by coal prices dramatic volatility.stripping costs and decrease in sales prices.
Coal production cash costs per tonne (see “— “Cash Costs per Tonne” Measure”) at Southern Kuzbass Coal Company increaseddecreased by RUB 430284 per tonne, or 25.1%10.8%, from RUB 1,7152,627 in the year ended December 31, 20162018 to RUB 2,1452,343 in the year ended December 31, 2017,2019, mainly due to a decrease in fixed costs share per tonne stimulated by production volumes increase.
Coal production cash costs at Yakutugol increased by RUB 1,180 per tonne, or 79.6%, from RUB 1,482 in the year ended December 31, 2018 to RUB 2,662 in the year ended December 31, 2019, mainly due to an increase in fixed costs share per tonne stimulated by production volumes decrease and growth of stripping costs.
Coke production cash costs decreased by 11.7% at Moscow Coke and Gas Plant mainly due to decrease in coking coal concentrate purchase prices and decrease in fixed costs share per tonne stimulated by production volumes increase.
Coke production cash costs increased by 2.7% at Mechel Coke, despite decrease in coking coal concentrate purchase prices, mainly due to an increase in fixed costs share per tonne stimulated by production volumes decrease.
CoalIron ore production cash costs at Yakutugol increaseddecreased by RUB 4 per tonne, or 0.5%, from RUB 825 in the year ended December 31, 2016 to RUB 829 in the year ended December 31, 2017,17.2% mainly due to the increasea decrease in fixed costs share per tonne stimulated by production volumes decrease.
Coke production cash costs increased by 41.8% at Moscow Coke and Gas Plant and 18.8% at Mechel Coke following the increase in coking coal concentrate purchase prices.
Iron ore production cash costs increased by 15.8% mainly due to increase in transportation cost per tonne and growth of stripping costs.increase.
Steel segment
Steel segment cost of sales increased by RUB 19,6244,084 million, or 15.5%2.7%, to RUB 146,369153,433 million in the year ended December 31, 20172019 from RUB 126,745149,349 million in the year ended December 31, 2016.2018. Steel segment cost of sales was 81.1%84.8% of the segment’s revenues in the year ended December 31, 2017,2019, as compared to 75.0%77.1% in the year ended December 31, 2016.2018. The decrease in gross profit percentage from 25.0%22.9% to 18.9%15.2% is explained by the decrease in sales volumes for most of the segment’s products and increase in costs per tonne sold as a result of purchase prices growth for raw materials (iron ore feed, coke, ferroalloys and electrodes)including pellets).
Power segment
Power segment cost of sales increased by RUB 791463 million, or 2.7%1.5%, to RUB 29,83831,137 million in the year ended December 31, 20172019 from RUB 29,04730,674 million in the year ended December 31, 2016,2018, due to increase in electricity tariffs and sales volumes. The power segment gross profit percentage increased to 29.9%29.8% in the year ended December 31, 20172019 from 28.5%29.1% in the year ended December 31, 20162018 mainly due to sales price increase.
“Cash Costs per Tonne” Measure
In this document, we present cash costs per tonne for coal, coke and iron ore production for each significant production facility of our mining segment. Cash costs per tonne is a performance indicator that is not defined according to IFRS or U.S. GAAP. Cash costs per tonne includes various production costs, such as raw materials, auxiliary materials, wages and social taxes of production personnel, electricity, gas and fuel costs, repairs and maintenance of production equipment, costs of mining works, mineral extraction tax and royalty payments, but excludesnon-cash items such as depreciation depletionand amortization and write-down of inventories to their net realizable value. We use this indicator to evaluate the performance of individual production subsidiaries and their
respective ability to generate cash. Cash costs per tonne is a widely used performance indicator in the mining industry to evaluate the cost-effectiveness of mining operations. We believe that investors use this indicator in addition to the financial information prepared in accordance with IFRS to evaluate the performance of our companies. Consequently, this information must be considered supplementary and should not be regarded as a substitute for the performance indicators prepared in accordance with IFRS.
The reconciliation of mining segment production cash costs per tonne for the year ended December 31, 20172019 is presented below:
| In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | |||||||||||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 4,182 | 2.1 | 8,971 | 4,077 | 2.3 | 9,554 | ||||||||||||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 833 | 2.1 | 1,788 | 751 | 2.3 | 1,761 | ||||||||||||||||||
Coal — Yakutugol — sales to third parties | 7,357 | 0.8 | 6,100 | 4,485 | 2.7 | 11,937 | ||||||||||||||||||
Coal — Yakutugol — intersegment sales | 0 | 0.8 | 0 | 20 | 2.7 | 52 | ||||||||||||||||||
Coal — Elgaugol — sales to third parties | 1,515 | 1.5 | 2,216 | 2,190 | 1.7 | 3,776 | ||||||||||||||||||
Coal — Elgaugol — intersegment sales | 87 | 1.5 | 127 | 74 | 1.7 | 128 | ||||||||||||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 30 | 2.3 | 69 | 193 | 2.5 | 487 | ||||||||||||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 2,448 | 2.3 | 5,566 | 2,331 | 2.5 | 5,891 | ||||||||||||||||||
Coke — Moscow Coke and Gas Plant — sales to third parties(1) | 556 | 12.0 | 6,670 | 639 | 11.5 | 7,350 | ||||||||||||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | 1 | 12.0 | 15 | 2 | 11.5 | 28 | ||||||||||||||||||
Coke — Mechel Coke — sales to third parties(2) | 214 | 7.0 | 1,497 | 306 | 7.6 | 2,339 | ||||||||||||||||||
Coke — Mechel Coke — intersegment sales | 1,914 | 7.0 | 13,384 | 1,580 | 7.6 | 12,071 | ||||||||||||||||||
Depreciation | 5,516 | |||||||||||||||||||||||
Depletion | 1,424 | |||||||||||||||||||||||
Depreciation and amortization | 6,295 | |||||||||||||||||||||||
Write-down of inventory to their net realizable value | 67 | 1,147 | ||||||||||||||||||||||
Cost of coal produced by third companies andre-sold by our trading subsidiaries, including intersegment sales | 69 | 39 | ||||||||||||||||||||||
Stockholding year to year movements, costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | (4,525 | ) | (303 | ) | ||||||||||||||||||||
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Total mining segment cost of sales | 48,952 | 62,554 | ||||||||||||||||||||||
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| (1) | Cash costs per tonne for coke were reduced byby-products credits. The amount ofby-products credits in the total cash costs per tonne was RUB |
| (2) | Cash costs per tonne for coke were reduced byby-products credits. The amount ofby-products credits in the total cash costs per tonne was RUB |
| (3) | Costs of other products and services were increased by the amount ofby-products credits of RUB |
The reconciliation of mining segment production cash costs per tonne for the year ended December 31, 20162018 is presented below:
| In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | |||||||||||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 4,464 | 1.7 | 7,655 | 3,445 | 2.6 | 9,050 | ||||||||||||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 1,021 | 1.7 | 1,751 | 716 | 2.6 | 1,882 | ||||||||||||||||||
Coal — Yakutugol — sales to third parties | 8,664 | 0.8 | 7,152 | 5,781 | 1.5 | 8,570 | ||||||||||||||||||
Coal — Yakutugol — intersegment sales | — | 0.8 | — | 44 | 1.5 | 65 | ||||||||||||||||||
Coal — Elgaugol — sales to third parties | 1,673 | 0.9 | 1,529 | 1,764 | 1.9 | 3,352 | ||||||||||||||||||
Coal — Elgaugol — intersegment sales | 44 | 0.9 | 41 | 142 | 1.9 | 270 | ||||||||||||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 26 | 2.0 | 52 | 140 | 3.1 | 427 | ||||||||||||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 2,684 | 2.0 | 5,272 | 1,785 | 3.1 | 5,450 | ||||||||||||||||||
Coke — Moscow Coke and Gas Plant — sales to third parties(1) | 682 | 8.5 | 5,769 | 497 | 13.0 | 6,485 | ||||||||||||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | 5 | 8.5 | 40 | 0.2 | 13.0 | 2 | ||||||||||||||||||
Coke — Mechel Coke — sales to third parties(2) | 211 | 5.9 | 1,244 | 199 | 7.4 | 1,481 | ||||||||||||||||||
Coke — Mechel Coke — intersegment sales | 1,938 | 5.9 | 11,405 | 1,743 | 7.4 | 12,967 | ||||||||||||||||||
Depreciation | 5,265 | |||||||||||||||||||||||
Depletion | 1,716 | |||||||||||||||||||||||
Depreciation and amortization | 6,424 | |||||||||||||||||||||||
Write-down of inventory to their net realizable value | 23 | 443 | ||||||||||||||||||||||
Cost of coal produced by third companies andre-sold by our trading subsidiaries, including intersegment sales | 170 | 80 | ||||||||||||||||||||||
Stockholding year to year movements, costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | (4,043 | ) | 284 | |||||||||||||||||||||
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Total mining segment cost of sales | 45,040 | 57,232 | ||||||||||||||||||||||
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| (1) | Cash costs per tonne for coke were reduced byby-products credits. The amount ofby-products credits in the total cash costs per tonne was RUB |
| (2) | Cash costs per tonne for coke were reduced byby-products credits. The amount ofby-products credits in the total cash costs per tonne was RUB |
| (3) | Costs of other products and services were increased by the amount ofby-products credits of RUB |
Selling, distribution and operating expensesincome and (expenses), net
Selling, distribution and operating expensesincome and (expenses), net decreased by RUB 5,4077,826 million, or 6.2%9.2%, to RUB 81,59077,212 million in the year ended December 31, 20172019 from RUB 86,99785,038 million in the year ended December 31, 2016,2018, as a result of a decrease in impairment of goodwill and othernon-current assets, net in the power and steel segments, as well as a decrease in administrative and other operating expenses in the mining and steel segments, selling and distribution expenses in thepower, steel and mining segments and lossa decrease in allowance for expected credit losses onwrite-off ofnon-current financial assets in the power and steel segments, which was partially offset by an increase in provision for fines and mining segmentspenalties related to the consolidated group of taxpayers of RUB 921 million, in the year ended December 31, 2017.2019. As a percentage of consolidated revenues, selling, distribution and operating expensesincome and (expenses), net decreased to 27.3%26.0% in the year ended December 31, 20172019 from 31.5%27.2% in the year ended December 31, 2016.2018. Our selling, distribution and operating expensesincome and (expenses), net consist primarily of selling and distribution expenses, loss onwrite-off ofnon-current assets, impairment of goodwill and other
non-current assets, provision (reversal of provision)net, allowance for doubtful accounts,expected credit losses on financial assets, taxes other than income taxes, administrative and other operating expenses and other operating income. The table below sets forth these costs by segment for the years ended December 31, 20172019 and 2016,2018, including as a percentage of segment revenues.
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||
Selling, Distribution and Operating Expenses by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||||||||||||||||||
Selling, Distribution and Operating Income and (Expenses), Net by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||
Mining segment | ||||||||||||||||||||||||||||||||
Selling and distribution expenses | 30,551 | 21.5 | % | 31,132 | 25.6 | % | 29,182 | 22.3 | % | 29,469 | 21.9 | % | ||||||||||||||||||||
Loss onwrite-off ofnon-current assets | 135 | 0.1 | % | 863 | 0.7 | % | ||||||||||||||||||||||||||
Impairment of goodwill and othernon-current assets | 3,801 | 2.7 | % | 1,335 | 1.1 | % | ||||||||||||||||||||||||||
Provision for doubtful accounts | 156 | 0.1 | % | 83 | 0.1 | % | ||||||||||||||||||||||||||
Impairment of goodwill and othernon-current assets, net | 3,688 | 2.8 | % | 3,684 | 2.7 | % | ||||||||||||||||||||||||||
Allowance for expected credit losses on financial assets | 43 | 0.1 | % | 43 | 0.1 | % | ||||||||||||||||||||||||||
Taxes other than income taxes | 3,329 | 2.3 | % | 3,959 | 3.3 | % | 3,041 | 2.3 | % | 2,942 | 2.2 | % | ||||||||||||||||||||
Administrative and other operating expenses | 7,789 | 5.5 | % | 9,538 | 7.8 | % | 8,550 | 6.5 | % | 9,025 | 6.7 | % | ||||||||||||||||||||
Other operating income | (488 | ) | (0.3 | %) | (1,407 | ) | (1.2 | %) | (255 | ) | (0.2 | %) | (538 | ) | (0.4 | %) | ||||||||||||||||
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Total | 45,273 | 31.8 | % | 45,503 | 37.4 | % | 44,249 | 33.9 | % | 44,625 | 33.2 | % | ||||||||||||||||||||
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Steel segment | ||||||||||||||||||||||||||||||||
Selling and distribution expenses | 14,266 | 7.9 | % | 15,392 | 9.1 | % | 13,725 | 7.6 | % | 14,134 | 7.3 | % | ||||||||||||||||||||
Loss onwrite-off ofnon-current assets | 145 | 0.1 | % | 1,089 | 0.6 | % | ||||||||||||||||||||||||||
Impairment of goodwill and othernon-current assets | 2,280 | 1.3 | % | 3,866 | 2.3 | % | ||||||||||||||||||||||||||
Reversal of provision for doubtful accounts | (266 | ) | (0.1 | %) | 231 | 0.1 | % | |||||||||||||||||||||||||
Impairment of goodwill and othernon-current assets, net | (1,884 | ) | (1.0 | %) | 819 | 0.4 | % | |||||||||||||||||||||||||
Allowance for expected credit losses on financial assets | 222 | 0.1 | % | 161 | 0.1 | % | ||||||||||||||||||||||||||
Taxes other than income taxes | 1,530 | 0.8 | % | 1,826 | 1.1 | % | 1,215 | 0.7 | % | 1,809 | 0.9 | % | ||||||||||||||||||||
Administrative and other operating expenses | 7,185 | 4.0 | % | 8,569 | 5.1 | % | 7,494 | 4.1 | % | 8,325 | 4.3 | % | ||||||||||||||||||||
Other operating income | (281 | ) | (0.2 | %) | (356 | ) | (0.2 | %) | (373 | ) | (0.2 | %) | (646 | ) | (0.3 | %) | ||||||||||||||||
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Total | 24,859 | 13.8 | % | 30,617 | 18.1 | % | 20,399 | 11.3 | % | 24,602 | 12.7 | % | ||||||||||||||||||||
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Power segment | ||||||||||||||||||||||||||||||||
Selling and distribution expenses | 10,869 | 25.5 | % | 9,710 | 23.9 | % | 11,413 | 25.7 | % | 11,385 | 26.3 | % | ||||||||||||||||||||
Loss onwrite-off ofnon-current assets | 41 | 0.1 | % | 1 | 0.0 | % | ||||||||||||||||||||||||||
Impairment of goodwill and othernon-current assets | — | 0.0 | % | — | 0.0 | % | ||||||||||||||||||||||||||
Provision for doubtful accounts | 442 | 1.0 | % | 443 | 1.1 | % | ||||||||||||||||||||||||||
Impairment of goodwill and othernon-current assets, net | — | 0.0 | % | 2,719 | 6.3 | % | ||||||||||||||||||||||||||
Allowance for expected credit losses on financial assets | (31 | ) | (0.1 | %) | 736 | 1.7 | % | |||||||||||||||||||||||||
Taxes other than income taxes | 108 | 0.3 | % | 129 | 0.3 | % | 105 | 0.2 | % | 83 | 0.2 | % | ||||||||||||||||||||
Administrative and other operating expenses | 616 | 1.4 | % | 685 | 1.7 | % | 273 | 0.6 | % | 1,415 | 3.3 | % | ||||||||||||||||||||
Other operating income | (618 | ) | (1.5 | %) | (91 | ) | (0.2 | %) | (118 | ) | (0.3 | %) | (527 | ) | (1.2 | %) | ||||||||||||||||
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Total | 11,458 | 26.9 | % | 10,877 | 26.8 | % | 11,642 | 26.3 | % | 15,811 | 36.6 | % | ||||||||||||||||||||
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Mining segment
Selling and distribution expenses consisted almost entirely of transportation expenses related to our selling activities. Such expenses decreased by RUB 581287 million, or 1.9%1.0%, to RUB 30,55129,182 million in the year ended
December 31, 2019 from RUB 29,469 million in the year ended December 31, 2017 from RUB 31,132 million in the year ended December 31, 2016,2018, mainly due to the decrease in segment export sales volumes by 6%.under CPT delivery terms. As a percentage of mining segment revenues, selling and distribution expenses decreasedincreased from 25.6%21.9% to 21.5% due to an increase in sales prices.
Loss onwrite-off ofnon-current assets decreased by RUB 728 million, or 84.3%, to RUB 135 million in the year ended December 31, 2017 from RUB 863 million in the year ended December 31, 2016,22.3% due to the decrease in sales prices and the number of property, plant and equipment objects that are not planned for further useincrease in production process at our mining service subsidiaries.railway tariffs.
Impairment of goodwill and othernon-current assets, net increased insignificantly by RUB 2,4664 million, or 184.7%0.1%, to RUB 3,8013,688 million in the year ended December 31, 20172019 from RUB 1,3353,684 million in the year ended December 31, 2016.2018. In 2017,2019, we recognized impairment of goodwill in relation to Yakutugol in the amount of RUB 3,139 million due to coal prices decline in long-term forecast along with forthcoming depletion of Neryungrinsky Open Pit and impairment of property, plant and equipment relating to Korshunov Mining Plant in the amount of RUB 549 million as the estimated future cash flows remain negative. In 2018, we recognized impairment of property, plant and equipment and mineral licenses in relation to (i) Korshunov Mining Plant of RUB 2,2711,151 million due toas the decline in long-term forecast for iron ore prices and growth of stripping costs required for removal of landslide deformationsestimated future cash flows remain negative and (ii) Southern Kuzbass Coal Company of RUB 1,5292,533 million due to changes in management’s plans to invest funds into the refusal byongoing construction projects and, as a result, the regulatory authoritiesinability to extendgenerate future economic benefits in the term of mineral license for exploration and extraction.current market conditions. See note 1817 to the consolidated financial statements.
ProvisionAllowance for doubtful accountsexpected credit losses on financial assets was stable and amounted to RUB 43 million in the years ended December 31, 2019 and 2018.
Taxes other than income taxes increased insignificantly by RUB 7399 million, or 3.4%, to RUB 1563,041 million in the year ended December 31, 20172019 from RUB 832,942 million in the year ended December 31, 2016, due to the increase in overdue accounts receivable.2018.
TaxesAdministrative and other than income taxesoperating expenses decreased by RUB 630475 million, or 15.9%5.3%, to RUB 3,3298,550 million in the year ended December 31, 20172019 from RUB 3,9599,025 million in the year ended December 31, 2016,2018, mainly due to obtainment of property tax benefit in respect of the rail linecost-cutting measures implemented by Elga-road in 2017.our management.
Administrative and otherOther operating expenses consist of payroll and payroll taxes, depreciation, rent and maintenance, legal and consulting expenses, office overheads and other expenses. These expensesincome decreased by RUB 1,749283 million, or 18.3%52.6%, to RUB 7,789255 million in the year ended December 31, 20172019 from RUB 9,538538 million in the year ended December 31, 2016,2018, mainly as a result ofdue to a decrease in salaries and related social taxes by RUB 2,067 million, or 32.0%, to RUB 4,386 millionsales of scrap in the year ended December 31, 2017 from RUB 6,453 million in the year ended December 31, 2016.
Other operating income decreased by RUB 919 million to RUB 488 million in the year ended December 31, 2017 from RUB 1,407 million in the year ended December 31, 2016, mainly due to insurance compensation for long-lived assets loss and revision of pension obligations and rehabilitation provisions in our mining subsidiaries in 2016.2019.
Steel segment
Selling and distribution expenses consisted almost entirely of transportation expenses related to our selling activities. Such expenses decreased by RUB 1,126409 million, or 7.3%2.9%, to RUB 14,26613,725 million in the year ended December 31, 20172019 from RUB 15,39214,134 million in the year ended December 31, 2016,2018, mainly due to the overall decrease in sales volumes of steel segment products.products, including the share of export sales, that was partially offset by the increase in railway tariffs in 2019 as compared to 2018. As a percentage of steel segment revenues, selling and distribution expenses decreasedincreased to 7.9%7.6% in the year ended December 31, 20172019 from 9.1%7.3% in the year ended December 31, 2016.
Loss onwrite-off ofnon-current assets decreased by RUB 944 million, or 86.7%, to RUB 145 million in the year ended December 31, 2017 from RUB 1,089 million in the year ended December 31, 2016, due to the decrease in a number of idled property, plant and equipment written off by our steel production subsidiaries.2018.
Impairment of goodwill and othernon-current assets, decreasednet changed by RUB 1,5862,703 million, or 41.0%330.1%, tofrom an impairment loss of RUB 2,280819 million in the year ended December 31, 20172018 to gain from reversal of an impairment of RUB 3,8661,884 million in the year ended December 31, 2016.2019. In 2016, we recognized2019, an impairment loss of goodwill and othernon-current assets in relation to Bratsk Ferroalloy Plantthe amount of RUB 3,6272,611 million previously recognized at Izhstal was reversed due to changesa decrease in expectations of long-termpurchase prices for ferrosilicon andelectrodes used as raw material for steel production in forecasted production volumes accompanied by increased forecasted costs.long-term forecast. In 2017,2019, we also recognized impairment of property, plant and equipment and construction in progress in relation to Izhstal of RUB 2,130 million and additional impairment in relation to Bratsk Ferroalloy Plant of RUB 151727 million due to ferrosilicon prices decline in long-term forecast. In 2018, we recognized additional to previously recognized impairment in relation to Izhstal of RUB 782 million and other companies of RUB 37 million.
ProvisionAllowance for doubtful accounts changedexpected credit losses on financial assets increased by RUB 49761 million, or 215.2%37.9%, to RUB 266222 million income from the effect of reversal in the year ended December 31, 20172019 from RUB 231161 million loss in the year ended December 31, 2016,2018, due to the decreasean increase in outstanding doubtfuloverdue accounts as of December 31, 2017 and collection of certain accounts receivable provided for as of December 31, 2016.receivable.
Taxes other than income taxes decreased by RUB 296594 million, or 16.2%32.8%, to RUB 1,5301,215 million in the year ended December 31, 20172019 from RUB 1,8261,809 million in the year ended December 31, 2016,2018, mainly due to recognition of probablechanges in Russian tax risks in respect of penalties on personal income tax in the amount of RUB 181 million in 2016. In 2017, these risks were reversed based on the tax audit conclusion. Property and land taxes decreased by RUB 34 million to RUB 1,295 million in the year ended December 31, 2017 from RUB 1,329 million in the year ended December 31, 2016.legislation associated with property tax.
Administrative and other operating expenses decreased by RUB 1,384831 million, or 16.1%10.0%, to RUB 7,1857,494 million in the year ended December 31, 20172019 from RUB 8,5698,325 million in the year ended December 31, 2016. Payroll and related social taxes decreased by RUB 1,730 million, or 35.7%, to RUB 3,113 million in the year ended December 31, 2017 from RUB 4,843 million in the year ended December 31, 2016, due to optimization of the number of employees. Fines and penalties expenses on breach of trading contracts, provisions related to claims increased by RUB 1,157 million, or 381.8%, to RUB 1,460 million in the year ended December 31, 2017 from RUB 303 million in the year ended December 31, 2016,2018, mainly due to recognition of provision related to claim of Minmetals. Other administrative and operating expenses decreased by RUB 811 million, or 23.7%, to RUB 2,613 million in the year ended December 31, 2017 from RUB 3,424 million in the year ended December 31, 2016, due to cost-cutting measures implemented by our management.
Other operating income decreased by RUB 75273 million, or 21.1%42.3%, to RUB 281373 million in the year ended December 31, 20172019 from RUB 356646 million in the year ended December 31, 2016,2018, mainly due to revision of rehabilitation provision.decrease inone-off income from operations with property, plant and equipment.
Power segment
Selling and distribution expenses consisted almost entirely of electricity transmission costs incurred by our Kuzbass Power Sales Company for the usage of the power grid through whichto distribute electricity is distributed to end consumers. Such expenses increased by RUB 1,15928 million, or 11.9%0.2%, to RUB 10,86911,413 million in the year ended December 31, 20172019 from RUB 9,71011,385 million in the year ended December 31, 2016,2018, due to an increase in transmission tariffs and sales volumes.
Other operating income was recognizeddecreased by RUB 409 million, or 77.6%, to RUB 118 million in the amount ofyear ended December 31, 2019 from RUB 619527 million in the year ended December 31, 2018, mainly as a result ofdue to subsidies received from the governmental authorities as a compensation for operating activities (energy tariffs). in 2018.
Operating profit
Operating profit increaseddecreased by RUB 14,47718,282 million, or 33.9%36.7%, to RUB 57,16731,498 million in the year ended December 31, 20172019 from RUB 42,69049,780 million in the year ended December 31, 2016.2018. As a percentage of consolidated revenues, operating profit increaseddecreased to 19.1%10.6% in the year ended December 31, 20172019 from 15.5%15.9% in the year ended December 31, 2016,2018, mainly due to an increasea decrease in consolidated gross profit and a decrease in administrative and other operating expenses and loss onwrite-off ofnon-current assets as explained above.
The table below sets out operating profit (loss) by segment, including as a percentage of segment revenues.
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||
Operating Profit by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | 48,191 | 33.8 | % | 31,012 | 25.5 | % | ||||||||||
Steel segment | 9,154 | 5.1 | % | 11,531 | 6.8 | % | ||||||||||
Power segment | 1,266 | 3.0 | % | 701 | 1.7 | % | ||||||||||
Elimination of intersegment unrealized profit(1) | (1,444 | ) | (554 | ) | ||||||||||||
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Consolidated operating profit | 57,167 | 42,690 | ||||||||||||||
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| Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||||||||||
Operating Profit (Loss) by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | 23,902 | 18.3 | % | 32,574 | 24.2 | % | ||||||||||
Steel segment | 7,126 | 3.9 | % | 19,831 | 10.2 | % | ||||||||||
Power segment | 1,548 | 3.5 | % | (3,240 | ) | (7.5 | )% | |||||||||
Elimination of intersegment unrealized profit(1) | (1,078 | ) | 615 | |||||||||||||
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Consolidated operating profit | 31,498 | 49,780 | ||||||||||||||
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| (1) | Our management evaluates the performance of our segments before the elimination of unrealized profit in inventory balances of segments that was generated by the segments but not recognized as profit in our consolidated financial statements until the sale of such inventories to third parties. Therefore, we present our segments before such elimination, and such elimination is presented separately. The |
Mining segment
Mining segment operating profit increaseddecreased by RUB 17,1798,672 million, or 55.4%26.6%, to RUB 48,19123,902 million in the year ended December 31, 20172019 from RUB 31,01232,574 million in the year ended December 31, 2016.2018. The operating
profit margin increaseddecreased to 33.8%18.3% in the year ended December 31, 20172019 from 25.5%24.2% in the year ended December 31, 2016,2018, mainly due to the increase in selling pricescost of sales caused by coal prices dramatic volatility.the growth of stripping costs and the decrease in selling prices.
Steel segment
Steel segment operating profit decreased by RUB 2,37712,705 million, or 20.6%64.1%, to RUB 9,1547,126 million in the year ended December 31, 20172019 from RUB 11,53119,831 million in the year ended December 31, 2016.2018. The operating profit margin decreased to 5.1%3.9% in the year ended December 31, 20172019 from 6.8%10.2% in the year ended December 31, 2016,2018, due to the factors that affected operating incomedecrease in 2017, such assales volumes for most of the recognition of losses from the impairment ofnon-current assets of Izhstal and Bratsk Ferroalloy Plantsegment’s products and the increase in cost of sales caused by the increase in purchase prices for main raw materials.sales.
Power segment
Power segment operating profit increased(loss) changed by RUB 5654,788 million, or 80.6%147.8%, to an operating profit of RUB 1,2661,548 million in the year ended December 31, 20172019 from an operating loss of RUB 7013,240 million in the year ended December 31, 2016.2018. The operating profit margin increasedchanged to 3.0%positive 3.5% in the year ended December 31, 20172019 from 1.7%negative 7.5% in the year ended December 31, 2016,2018, mainly due to increaseimpairment of goodwill and property, plant and equipment at Southern Kuzbass Power Plant recognized in gross margin caused by the increaseyear ended December 31, 2018 and reversal of provision for legal claims in sales prices and receiving of subsidies from the governmental authorities as a compensation for operating activities (energy tariffs).year ended December 31, 2019.
Other income and expense, net
Other income and expense, net consists of share of gain (loss) of an associate, finance income, finance costs, other income and other expenses and foreign exchange gain. The table below sets forth these costs for the years ended December 31, 2017 and 2016, including as a percentage of revenues.
| Year Ended December 31, 2017 | Year Ended December 31, 2016 | |||||||||||||||
Other Income and Expense, Net | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Finance income | 633 | 0.2 | % | 1,176 | 0.4 | % | ||||||||||
Finance costs | (47,610 | ) | (15.9 | )% | (54,240 | ) | (19.7 | )% | ||||||||
Foreign exchange gain | 4,237 | 1.4 | % | 25,947 | 9.4 | % | ||||||||||
Share of gain (loss) of an associate | 18 | 0.0 | % | (17 | ) | 0.0 | % | |||||||||
Other income | 1,495 | 0.5 | % | 598 | 0.2 | % | ||||||||||
Other expenses | (220 | ) | (0.1 | )% | (1,999 | ) | (0.7 | )% | ||||||||
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Total | (41,447 | ) | (13.9 | )% | (28,535 | ) | (10.3 | )% | ||||||||
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Finance income decreased by RUB 543 million, or 46.2%, to RUB 633 million in the year ended December 31, 2017 from RUB 1,176 million in the year ended December 31, 2016, due to waiving of fines and
penalties on finance leases as a result of restructuring primarily with Sberbank in 2016. In 2017, restructuring effect was not significant.
Finance costs decreased by RUB 6,630 million, or 12.2%, to RUB 47,610 million in the year ended December 31, 2017 from RUB 54,240 million in the year ended December 31, 2016, due to the restructuring of overdue borrowings in 2016 and decrease in fines and penalties and interest rates in 2017.
Foreign exchange gain decreased by RUB 21,710 million, or 83.7%, to RUB 4,237 million in the year ended December 31, 2017 from RUB 25,947 million in the year ended December 31, 2016, mainly due to moderate appreciation of the ruble against the U.S. dollar in 2017 as compared to 2016.
Share of gain (loss) of an associate changed by RUB 35 million, or 205.9%, to RUB 18 million gain in the year ended December 31, 2017 from RUB 17 million loss in the year ended December 31, 2016, mainly due to loss in the amount of RUB 42 million from investments in Mechel Somani Carbon Private Limited in 2016.
Other income increased by RUB 897 million, or 150.0%, to RUB 1,495 million in the year ended December 31, 2017 from RUB 598 million in the year ended December 31, 2016, mainly due to gain from waiving of penalties from Novatek — Chelyabinsk OOO in the amount of RUB 442 million and a gain on thewrite-off of payable amounts that werewritten-off due to liquidation of the creditors or expiration of the statute of limitation in the amount of RUB 310 million.
Other expenses decreased by RUB 1,779 million, or 89.0%, to RUB 220 million in the year ended December 31, 2017 from RUB 1,999 million in the year ended December 31, 2016. In 2016, there was awrite-off of Vnesheconombank’s commission in the amount of RUB 1,411 million and recognition of a provision fornon-recoverable advances to pension funds in the amount of RUB 408 million. There were no such operations in 2017.
Income tax expense
Income tax expense decreased by RUB 1,743 million, or 35.6%, to RUB 3,150 million in the year ended December 31, 2017 from RUB 4,893 million in the year ended December 31, 2016. Our effective tax rate decreased to 20.0% from 34.6%. The decrease in income tax expense and effective tax rate is mainly due to recognition of deferred tax asset on tax loss from the consolidated group of taxpayers. This decrease was partially offset by the increase in current income tax expense because of the increase in the tax base as a result of the rise in prices. In addition, income tax risk related to the consolidated group of taxpayers was accrued in 2017.
Net profit attributable tonon-controlling interests
Net profit attributable tonon-controlling interests decreased by RUB 693 million, or 40.6%, to RUB 1,013 million in the year ended December 31, 2017 from RUB 1,706 million in the year ended December 31, 2016, mainly due to decrease in net profit attributable tonon-controlling interests in our subsidiaries Chelyabinsk Metallurgical Plant in the amount of RUB 501.2 million (loss) and Izhstal in the amount of RUB 212.8 million (loss).
Net profit attributable to equity holders of the parent
Net profit attributable to our equity holders increased by RUB 4,431 million, or 62.2%, to RUB 11,557 million in the year ended December 31, 2017 from RUB 7,126 million in the year ended December 31, 2016, mainly due to the increase in operating margin.
Year ended December 31, 2016 compared to year ended December 31, 2015
Revenues
Consolidated revenues increased by RUB 22,868 million, or 9.0%, to RUB 276,009 million in the year ended December 31, 2016 from RUB 253,141 million in the year ended December 31, 2015.
The sales increase was due to an increase in sales prices across our major segments.
The following table sets forth our net revenues by segment, including a breakdown by sales to third parties and other segments.
| Year Ended December 31, | ||||||||
Revenues by Segment | 2016 | 2015 | ||||||
| (In millions of Russian rubles, except for percentages) | ||||||||
Mining segment | ||||||||
To third parties | 89,647 | 80,632 | ||||||
To power segment | 1,370 | 1,800 | ||||||
To steel segment | 30,537 | 26,291 | ||||||
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Total | 121,554 | 108,723 | ||||||
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Steel segment | ||||||||
To third parties | 161,639 | 146,032 | ||||||
To power segment | 5,693 | 5,475 | ||||||
To mining segment | 1,562 | 1,497 | ||||||
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Total | 168,893 | 153,004 | ||||||
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Power segment | ||||||||
To third parties | 24,723 | 26,477 | ||||||
To steel segment | 11,709 | 11,131 | ||||||
To mining segment | 4,193 | 3,858 | ||||||
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Total | 40,626 | 41,467 | ||||||
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Eliminations | 55,064 | 50,052 | ||||||
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Consolidated revenues | 276,009 | 253,141 | ||||||
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% from mining segment | 32.5 | % | 31.9 | % | ||||
% from steel segment | 58.5 | % | 57.7 | % | ||||
% from power segment | 9.0 | % | 10.5 | % | ||||
Mining segment
Our mining segment revenues increased by RUB 12,831 million, or 11.8%, to RUB 121,554 million in the year ended December 31, 2016 from RUB 108,723 million in the year ended December 31, 2015.
Coking coal concentrate sales to third parties increased by RUB 11,534 million, or 42.4%, to RUB 38,744 million in the year ended December 31, 2016 from RUB 27,210 million in the year ended December 31, 2015, as a result of an increase in sales volumes of RUB 2,790 million and an increase in sales prices of RUB 8,744 million. The Chinese government’s actions to reduce coal supply were the primary driver of the coal price rally in 2016. According to CRU, in 2016, the premium hard coking coal spot price increased four times from the beginning of the year and reached $310 per tonne (FOB Australia) in November. The average contract price in 2016 was $114 per tonne, 12% higher than the average contract price in 2015, according to CRU. The average spot price in 2016 was $140 per tonne (FOB Australia), 55% higher than the average spot price in 2015, according to CRU.
The volume of coking coal concentrate sold to third parties increased by 538 thousand tonnes, or 10.3%, to 5,784 thousand tonnes in the year ended December 31, 2016 from 5,246 thousand tonnes in the year ended December 31, 2015. The increase in sales volumes was mainly due to the increased demand for coking coal concentrate.
The volume of coking coal concentrate sold to third parties increased at Yakutugol and decreased at Southern Kuzbass Coal Company. Yakutugol’s coking coal concentrate sales volumes increased by 605 thousand tonnes, or 13.4%, to 5,120 thousand tonnes in the year ended December 31, 2016 from 4,515 thousand tonnes in the year ended December 31, 2015 due to higher coking coal output as a result of favorable geological conditions. Southern Kuzbass Coal Company’s coking coal concentrate sales volumes decreased by 289 thousand tonnes, or 40.7%, to 421 thousand tonnes in the year ended December 31, 2016 from 710 thousand tonnes in the year ended December 31, 2015 due to decrease in production as a result of equipment breakdown.
Coke sales to third parties decreased by RUB 87 million, or 0.9%, to RUB 9,342 million in the year ended December 31, 2016 from RUB 9,429 million in the year ended December 31, 2015, as a result of a decrease in sales volumes of RUB 874 million that was offset by an increase in sales prices of RUB 787 million. In 2016, the world coke price showed almost the same dynamics as coking coal prices. According to CRU, coke prices increased from $113 per tonne (FOB China basis) in the first quarter of the year to $307 per tonne (FOB China basis) in the fourth quarter of the year. Domestic coke price in 2016 was 12,022 rubles per tonne (including VAT, FCA basis), 10% higher than the average price in 2015, according to Metal-Courier. Price growth in the domestic coke market was due to sharp rise of coking coal prices in the second half of the year in Russia which led to costs increase of coke producers and increased coke prices on export markets.
Coke supplied to the steel segment increased by RUB 1,852 million, or 9.6%, to RUB 21,086 million in the year ended December 31, 2016 from RUB 19,234 million in the year ended December 31, 2015. The increase was due to an increase in sales prices of RUB 1,691 million that was enforced by an increase in sales volumes of RUB 161 million. Coke sales volumes from Mechel Coke to Chelyabinsk Metallurgical Plant increased by 14 thousand tonnes, or 0.7%, to 1,921 thousand tonnes in the year ended December 31, 2016 from 1,907 thousand tonnes in the year ended December 31, 2015.
Chemical products sales to third parties decreased by RUB 339 million, or 14.6%, to RUB 1,988 million in the year ended December 31, 2016 from RUB 2,327 million in the year ended December 31, 2015, mainly as a result of a decrease in both sales volumes and sales prices.
Anthracite and PCI sales to third parties decreased by RUB 6,253 million, or 25.0%, to RUB 18,737 million in the year ended December 31, 2016 from RUB 24,990 million in the year ended December 31, 2015, as a result of a decrease in sales prices of RUB 552 million and a decrease in sales volumes of RUB 5,701 million. The decrease in sales volumes of anthracite and PCI was due to drop in coal extraction at Krasnogorsky Open Pit as a result of logistical problems.
Steam coal sales to third parties increased by RUB 5,351 million, or 73.9%, to RUB 12,587 million in the year ended December 31, 2016 from RUB 7,236 million in the year ended December 31, 2015, as a result of an increase in sales volumes of RUB 3,071 million and an increase in sales prices of RUB 2,280 million. In 2016, starting from June steam coal price began to rise sharply due to the Chinese government’s coal supply policy, according to Platts. As a result of decreased coal production in China steam coal price rose from $53 per tonne in June to $87 per tonne in December. The average price in 2016 was $60 per tonne (CIF Amsterdam/Rotterdam/Antwerp), 7% higher than the average price in 2015, according to Platts.
Steam coal supplied to the power segment decreased by RUB 129 million, or 26.9%, to RUB 350 million in the year ended December 31, 2016 from RUB 479 million in the year ended December 31, 2015, as a result of a decrease in sales volumes. Sales of steam coal to the power segment companies decreased by 220 thousand tonnes, or 37.8%, to 362 thousand tonnes in the year ended December 31, 2016 from 582 thousand tonnes in the year ended December 31, 2015 due to power production decrease.
Sales of iron ore concentrate to third parties decreased by RUB 1,718 million, or 93.2%, to RUB 126 million in the year ended December 31, 2016 from RUB 1,844 million in the year ended December 31, 2015, as a result of a decrease in sales volumes of RUB 1,745 million that was partially offset by an increase in sales
prices of RUB 27 million. During 2016, iron ore spot prices were generally rising with minor downward corrections inMay-June and September. The iron ore spot price increased from a low of $42 per dry metric tonne (62% Fe, CFR China) in January to a high of $80 per dry metric tonne in December, according to MMI. The average spot price in 2016 was $58 per dry metric tonne which was 4% higher than the average price in 2015, according to MMI.
Supplies of iron ore concentrate to the steel segment increased by RUB 2,601 million, or 44.5%, to RUB 8,444 million in the year ended December 31, 2016 from RUB 5,843 million in the year ended December 31, 2015, as a result of a RUB 1,010 million increase in sales volumes and a RUB 1,590 million increase in sales prices. Sales volumes increased due to the continued group strategy of redirection of iron ore sales volumes from third parties to our group consumers.The share of iron ore concentrate consumed at Chelyabinsk Metallurgical Plant and produced by Korshunov Mining Plant increased from 52.5% in the year ended December 31, 2015 to 67.4% in the year ended December 31, 2016.
Excluding intersegment sales, export sales were stable at 74.6% of mining segment sales in the year ended December 31, 2016, compared to 74.1% in the year ended December 31, 2015.
Steel segment
Our steel segment revenues increased by RUB 15,889 million, or 10.4%, to RUB 168,893 million in the year ended December 31, 2016 from RUB 153,004 million in the year ended December 31, 2015, due to an increase in sales prices and volumes. The increase in third-party sales volumes was due to the strong domestic demand and growth in production and sales volumes of high value-added products of the universal rolling mill, including the commencement of rails supply to Russian Railways.
Semi-finished products sales decreased by RUB 1,593 million, or 31.7%, to RUB 3,434 million in the year ended December 31, 2016 from RUB 5,027 million in the year ended December 31, 2015, as a result of a decrease of RUB 78 million in sales prices and a decrease of RUB 1,516 million in sales volumes. In 2016, the annual average price for billets (including VAT, FCA basis) was 18,812 rubles per tonne, 3.0% lower than the average price in 2015. The decrease in third-party sales volumes was due to increase in consumption within our steel segment and decrease in production volumes as a result of temporary suspension of equipment and its repair.
Other long products sales increased by RUB 10,947 million, or 38.9%, to RUB 39,099 million in the year ended December 31, 2016 from RUB 28,152 million in the year ended December 31, 2015, as a result of an increase of RUB 1,455 million in sales prices and an increase of RUB 9,492 million in sales volumes. The increase in sales prices was mainly due to increase in prices for steel-making raw materials (iron ore, coke, coking coal, etc.). Sales volumes increased due to strengthening demand in the Russian market and increase in the range of the universal rolling mill’s products.
Other flat products sales increased by RUB 1,797 million, or 12.0%, to RUB 16,723 million in the year ended December 31, 2016 from RUB 14,926 million in the year ended December 31, 2015, as a result of an increase of RUB 1,066 million in sales prices and an increase of RUB 731 million in sales volumes. In 2016, the annual average price for flat steel products (including VAT, FCA basis) was 35,989 rubles per tonne, 0.3% higher than the average price in 2015. The annual average price forhot-rolled coil (Russia exports, FOB Black Sea) in U.S. dollars increased by 11.5% to $387 per tonne in the year ended December 31, 2016 from $347 per tonne in the year ended December 31, 2015, according to Metal Expert. The sales volume increased due to the growth in market share and strengthening of consumer demand in the European market.
Wire sales decreased by RUB 31 million, or 0.2%, to RUB 15,530 million in the year ended December 31, 2016 from RUB 15,561 million in the year ended December 31, 2015, as a result of a decrease of RUB 826 million in sales volumes that was offset by an increase of RUB 795 million in sales prices. The increase in
sales prices was driven by the increase in the prices of wire rod used as the main input for wire production. Sales volumes decreased due to the weakened demand in Russia and Europe.
Rebar sales increased by RUB 5,224 million, or 13.1%, to RUB 45,204 million in the year ended December 31, 2016 from RUB 39,980 million in the year ended December 31, 2015, as a result of an increase of RUB 5,170 million in sales prices and an increase of RUB 54 million in sales volumes. In 2016, the Russian domestic price for rebar increased due to favorable market conditions. Sales volumes increased due to recovery of demand in construction sector.
Steel pipes sales decreased by RUB 22 million, or 0.7%, to RUB 3,286 million in the year ended December 31, 2016 from RUB 3,308 million in the year ended December 31, 2015, as a result of a decrease of RUB 389 million in sales volumes that was offset by an increase of RUB 367 million in sales prices. The price increased mainly due to increase in purchase prices for raw materials. The sales volume decreased due to lower demand in the Russian market.
Pig iron sales decreased by RUB 608 million, or 47.2%, to RUB 679 million in the year ended December 31, 2016 from RUB 1,287 million in the year ended December 31, 2015, as a result of a decrease of RUB 127 million in sales prices and a decrease of RUB 481 million in sales volumes. The decrease in third-party sales volumes was due to the increase in consumption within our steel segment.
Stampings sales increased by RUB 317 million, or 4.6%, to RUB 7,235 million in the year ended December 31, 2016 from RUB 6,918 million in the year ended December 31, 2015, as a result of a decrease of RUB 522 million in sales prices that was offset by an increase of RUB 839 million in sales volumes. The decrease in sales prices was driven by the decrease in domestic and export prices during 2016. The increase in sales volumes was due to recovery of demand from the key consuming industries (engineering and transport industries).
Ferrosilicon sales decreased by RUB 160 million, or 4.5%, to RUB 3,368 million in the year ended December 31, 2016 from RUB 3,528 million in the year ended December 31, 2015, as a result of a decrease of RUB 262 million in sales prices that was partially offset by an increase of RUB 101 million in sales volumes. The decrease in sales prices was driven by depreciation of the average rate of the ruble against the U.S. dollar by 10% as compared to the average rate of the ruble against the U.S. dollar in 2015. The decrease in domestic sales volumes was due to decrease in ferrosilicon consumption in Russia. The overall increase in sales volumes was due to increase in export sales as a result of favorable market conditions in Japan.
Sales ofnon-core products and services increased by RUB 906 million, or 15.3%, to RUB 6,835 million in the year ended December 31, 2016 from RUB 5,929 million in the year ended December 31, 2015, due to overall revival of domestic market.
Excluding intersegment sales, export sales were 14.0% of steel segment sales in the year ended December 31, 2016, compared to 17.7% in the year ended December 31, 2015.
Power segment
Our power segment revenues decreased by RUB 842 million, or 2.0%, to RUB 40,625 million in the year ended December 31, 2016 from RUB 41,467 million in the year ended December 31, 2015.
Electricity sales to third parties decreased by RUB 1,997 million, or 8.0%, to RUB 22,527 million in the year ended December 31, 2016 from RUB 24,524 million in the year ended December 31, 2015, as a result of a decrease of RUB 5,550 million in sales volumes that was partially offset by an increase of RUB 3,553 million in sales prices.
Other revenue, which consists mostly of heat energy and capacity, increased by RUB 244 million, or 12.5%, to RUB 2,196 million in the year ended December 31, 2016 from RUB 1,952 million in the year ended December 31, 2015, due to the increase in sales volumes of Kuzbass Power Sales Company.
Intersegment sales increased by RUB 913 million, or 6.1%, to RUB 15,903 million in the year ended December 31, 2016 from RUB 14,990 million in the year ended December 31, 2015, mainly as a result of an increase in electricity tariffs.
Cost of sales and gross profit
The consolidated cost of sales was 53.0% of consolidated revenues in the year ended December 31, 2016, as compared to 59.8% of consolidated revenues in the year ended December 31, 2015, resulting in an increase in consolidated gross profit to 47.0% in the year ended December 31, 2016 from 40.2% for the year ended December 31, 2015. Cost of sales primarily consists of costs relating to raw materials (including products purchased for resale), direct payroll, depreciation and energy. The table below sets forth cost of sales and gross profit by segment for the years ended December 31, 2016 and 2015, including as a percentage of segment revenues.
| Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||||||||||
Cost of Sales and Gross Profit by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | ||||||||||||||||
Cost of sales | 45,040 | 37.1 | % | 51,280 | 47.2 | % | ||||||||||
Gross profit | 76,515 | 62.9 | % | 57,442 | 52.8 | % | ||||||||||
Steel segment | ||||||||||||||||
Cost of sales | 126,745 | 75.0 | % | 119,610 | 78.2 | % | ||||||||||
Gross profit | 42,148 | 25.0 | % | 33,394 | 21.8 | % | ||||||||||
Power segment | ||||||||||||||||
Cost of sales | 29,047 | 71.5 | % | 30,178 | 72.8 | % | ||||||||||
Gross profit | 11,578 | 28.5 | % | 11,289 | 27.2 | % | ||||||||||
Mining segment
Mining segment cost of sales decreased by RUB 6,240 million, or 12.2%, to RUB 45,040 million in the year ended December 31, 2016 from RUB 51,280 million in the year ended December 31, 2015. The gross profit percentage increased to 62.9% in the year ended December 31, 2016 compared to 52.8% in the year ended December 31, 2015, mainly due to the increase in selling prices caused by the global coal prices rally.
Coal production cash costs per tonne (see “— “Cash Costs per Tonne” Measure”) at Southern Kuzbass Coal Company increased by RUB 255 per tonne, or 17.5%, from RUB 1,460 in the year ended December 31, 2015 to RUB 1,715 in the year ended December 31, 2016, mainly due to the increase in fixed costs share per tonne stimulated by production volumes decrease.
Coal production cash costs at Yakutugol decreased by RUB 34 per tonne, or 4.1%, from RUB 860 in the year ended December 31, 2015 to RUB 825 in the year ended December 31, 2016, mainly due to the decrease in fixed costs share per tonne stimulated by production volumes increase.
Coke production cash costs increased by 14.7% at Moscow Coke and Gas Plant following the increase in coking coal concentrate purchase prices caused by the global coal prices rally.
Iron ore production cash costs slightly decreased by 2.3% in the year ended December 31, 2016.
Steel segment
Steel segment cost of sales increased by RUB 7,135 million, or 6.0%, to RUB 126,745 million in the year ended December 31, 2016 from RUB 119,610 million in the year ended December 31, 2015. Steel segment cost of sales was 75.0% of the segment’s revenues in the year ended December 31, 2016, as compared to 78.2% in the year ended December 31, 2015. The increase in gross profit from 21.8% to 25.0% is mainly explained by the increase in sales prices caused by the recovery of demand.
Power segment
Power segment cost of sales decreased by RUB 1,131 million, or 3.8%, to RUB 29,047 million in the year ended December 31, 2016 from RUB 30,178 million in the year ended December 31, 2015, due to decrease in sales volumes. The power segment gross profit percentage increased to 28.5% in the year ended December 31, 2016 from 27.2% in the year ended December 31, 2015 due to sales price increase.
“Cash Costs per Tonne” Measure
In this document, we present cash costs per tonne for coal, coke and iron ore production for each significant production facility of our mining segment. Cash costs per tonne is a performance indicator that is not defined according to IFRS or U.S. GAAP. Cash costs per tonne includes various production costs, such as raw materials, auxiliary materials, wages and social taxes of production personnel, electricity, gas and fuel costs, repairs and maintenance of production equipment, costs of mining works, mineral extraction tax and royalty payments, but excludesnon-cash items such as depreciation, depletion and write-down of inventories to their net realizable value. We use this indicator to evaluate the performance of individual production subsidiaries and their respective ability to generate cash. Cash costs per tonne is a widely used performance indicator in the mining industry to evaluate the cost-effectiveness of mining operations. We believe that investors use this indicator in addition to the financial information prepared in accordance with IFRS to evaluate the performance of our companies. Consequently, this information must be considered supplementary and should not be regarded as a substitute for the performance indicators prepared in accordance with IFRS.
The reconciliation of mining segment production cash costs per tonne for the year ended December 31, 2016 is presented below:
| In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | ||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 4,464 | 1.7 | 7,655 | |||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 1,021 | 1.7 | 1,751 | |||||||||
Coal — Yakutugol — sales to third parties | 8,664 | 0.8 | 7,152 | |||||||||
Coal — Yakutugol — intersegment sales | — | 0.8 | — | |||||||||
Coal — Elgaugol — sales to third parties | 1,673 | 0.9 | 1,529 | |||||||||
Coal — Elgaugol — intersegment sales | 44 | 0.9 | 41 | |||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 26 | 2.0 | 52 | |||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 2,684 | 2.0 | 5,272 | |||||||||
Coke — Moscow Coke and Gas Plant — sales to third parties(1) | 682 | 8.5 | 5,769 | |||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | 5 | 8.5 | 40 | |||||||||
Coke — Mechel Coke — sales to third parties(2) | 211 | 5.9 | 1,244 | |||||||||
Coke — Mechel Coke — intersegment sales | 1,938 | 5.9 | 11,405 | |||||||||
Depreciation | 5,265 | |||||||||||
Depletion | 1,716 | |||||||||||
Write-down of inventory to their net realizable value | 23 | |||||||||||
Cost of coal produced by third companies andre-sold by our trading subsidiaries, including intersegment sales | 170 | |||||||||||
Stockholding year to year movements, costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | (4,043 | ) | ||||||||||
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Total mining segment cost of sales | 45,040 | |||||||||||
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The reconciliation of mining segment production cash costs per tonne for the year ended December 31, 2015 is presented below:
| In thousands of tonnes | Cash cost, in thousands of Russian rubles per tonne | In millions of Russian rubles | ||||||||||
Coal — Southern Kuzbass Coal Company — sales to third parties | 5,012 | 1.5 | 7,317 | |||||||||
Coal — Southern Kuzbass Coal Company — intersegment sales | 1,674 | 1.5 | 2,444 | |||||||||
Coal — Yakutugol — sales to third parties | 7,540 | 0.9 | 6,483 | |||||||||
Coal — Yakutugol — intersegment sales | — | 0.9 | — | |||||||||
Coal — Elgaugol — sales to third parties | 1,575 | 0.8 | 1,280 | |||||||||
Coal — Elgaugol — intersegment sales | 6 | 0.8 | 5 | |||||||||
Iron ore — Korshunov Mining Plant — sales to third parties | 489 | 2.0 | 983 | |||||||||
Iron ore — Korshunov Mining Plant — intersegment sales | 2,288 | 2.0 | 4,598 | |||||||||
Coke — Moscow Coke and Gas Plant — sales to third parties(1) | 715 | 7.4 | 5,268 | |||||||||
Coke — Moscow Coke and Gas Plant — intersegment sales | 3 | 7.4 | 20 | |||||||||
Coke — Mechel Coke — sales to third parties(2) | 270 | 6.0 | 1,612 | |||||||||
Coke — Mechel Coke — intersegment sales | 1,924 | 6.0 | 11,499 | |||||||||
Depreciation | 6,532 | |||||||||||
Depletion | 1,685 | |||||||||||
Write-down of inventory to their net realizable value | 6 | |||||||||||
Cost of coal produced by third companies andre-sold by our trading subsidiaries, including intersegment sales | 346 | |||||||||||
Stockholding year to year movements, costs of other products and services (coking products, washing services) and costs of other subsidiaries(3) | 1,200 | |||||||||||
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Total mining segment cost of sales | 51,280 | |||||||||||
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Selling, distribution and operating expenses
Selling, distribution and operating expenses increased by RUB 9,442 million, or 12.2%, to RUB 86,997 million in the year ended December 31, 2016 from RUB 77,555 million in the year ended December 31, 2015, as a result of an increase in selling and distribution expenses in the mining, steel and power segments, impairment of goodwill and othernon-current assets in the mining and steel segments and loss onwrite-off ofnon-current assets in the mining and steel segments in the year ended December 31, 2016. As a percentage of consolidated revenues, selling, distribution and operating expenses increased to 31.5% in the year ended December 31, 2016 from 30.6% in the year ended December 31, 2015. Our selling, distribution and operating expenses consist primarily of selling and distribution expenses, loss onwrite-off ofnon-current assets, impairment of goodwill and othernon-current assets, provision for doubtful accounts, taxes other than income taxes, administrative and other operating expenses and other operating income. The table below sets forth these costs by segment for the years ended December 31, 2016 and 2015, including as a percentage of segment revenues.
| Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||||||||||
Selling, Distribution and Operating Expenses by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | ||||||||||||||||
Selling and distribution expenses | 31,132 | 25.6 | % | 28,588 | 26.3 | % | ||||||||||
Loss onwrite-off ofnon-current assets | 863 | 0.7 | % | 199 | 0.2 | % | ||||||||||
Impairment of goodwill and othernon-current assets | 1,335 | 1.1 | % | — | 0.0 | % | ||||||||||
Provision for doubtful accounts | 83 | 0.1 | % | 247 | 0.2 | % | ||||||||||
Taxes other than income taxes | 3,959 | 3.3 | % | 3,706 | 3.4 | % | ||||||||||
Administrative and other operating expenses | 9,538 | 7.8 | % | 8,872 | 8.2 | % | ||||||||||
Other operating income | (1,407 | ) | (1.2 | %) | (175 | ) | (0.2 | %) | ||||||||
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Total | 45,503 | 37.4 | % | 41,437 | 38.1 | % | ||||||||||
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Steel segment | ||||||||||||||||
Selling and distribution expenses | 15,392 | 9.1 | % | 13,736 | 9.0 | % | ||||||||||
Loss onwrite-off ofnon-current assets | 1,089 | 0.6 | % | 492 | 0.3 | % | ||||||||||
Impairment of goodwill and othernon-current assets | 3,866 | 2.3 | % | 16 | 0.0 | % | ||||||||||
Provision for doubtful accounts | 231 | 0.1 | % | 948 | 0.6 | % | ||||||||||
Taxes other than income taxes | 1,826 | 1.1 | % | 2,044 | 1.3 | % | ||||||||||
Administrative and other operating expenses | 8,569 | 5.1 | % | 7,825 | 5.1 | % | ||||||||||
Other operating income | (356 | ) | (0.2 | %) | (193 | ) | (0.1 | %) | ||||||||
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Total | 30,617 | 18.1 | % | 24,868 | 16.3 | % | ||||||||||
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Power segment | ||||||||||||||||
Selling and distribution expenses | 9,710 | 23.9 | % | 8,792 | 21.2 | % | ||||||||||
Loss onwrite-off ofnon-current assets | 1 | 0.0 | % | — | 0.0 | % | ||||||||||
Impairment of goodwill and othernon-current assets | — | 0.0 | % | 1,444 | 3.5 | % | ||||||||||
Provision for doubtful accounts | 443 | 1.1 | % | 312 | 0.8 | % | ||||||||||
Taxes other than income taxes | 129 | 0.3 | % | 103 | 0.2 | % | ||||||||||
Administrative and other operating expenses | 685 | 1.7 | % | 603 | 1.5 | % | ||||||||||
Other operating income | (91 | ) | (0.2 | %) | (4 | ) | (0.0 | %) | ||||||||
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Total | 10,877 | 26.8 | % | 11,250 | 27.1 | % | ||||||||||
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Mining segment
Selling and distribution expenses consisted almost entirely of transportation expenses related to our selling activities. Such expenses increased by RUB 2,544 million, or 8.9%, to RUB 31,132 million in the year ended
December 31, 2016 from RUB 28,588 million in the year ended December 31, 2015, mainly due to the increase in segment export sales volumes by 3%. As a percentage of mining segment revenues, selling and distribution expenses decreased from 26.3% to 25.6% due to an increase in sales prices.
Loss onwrite-off ofnon-current assets increased by RUB 664 million, or 333.7%, to RUB 863 million in the year ended December 31, 2016 from RUB 199 million in the year ended December 31, 2015, due to the increase in a number of property, plant and equipment objects that are not planned for further use in production process at our mining service subsidiaries.
Impairment of goodwill and othernon-current assets amounted to RUB 1,335 million in the year ended December 31, 2016. The carrying value ofnon-current assets of mining subsidiaries was impaired due to inability to generate economic benefits. See note 18 to the consolidated financial statements.
Provision for doubtful accounts decreased by RUB 164 million to RUB 83 million in the year ended December 31, 2016 from RUB 247 million in the year ended December 31, 2015, due to the decrease in overdue accounts receivable.
Taxes other than income taxes slightly increased by RUB 253 million, or 6.8%, to RUB 3,959 million in the year ended December 31, 2016 from RUB 3,706 million in the year ended December 31, 2015, due to recognition of probable tax risks in respect of penalties related to personal income tax among our mining subsidiaries in 2016.
Administrative and other operating expenses consist of payroll and payroll taxes, depreciation, rent and maintenance, legal and consulting expenses, office overheads and other expenses. These expenses increased by RUB 666 million, or 7.5%, to RUB 9,538 million in the year ended December 31, 2016 from RUB 8,872 million in the year ended December 31, 2015, mainly as a result of recognition of other operating income: salaries and related social taxes increased by RUB 1,154 million, or 21.8%, to RUB 6,453 million in the year ended December 31, 2016 from RUB 5,299 million in the year ended December 31, 2015; legal and consulting fees and insurance services decreased by 7.9% to RUB 256 million in the year ended December 31, 2016 from RUB 278 million in the year ended December 31, 2015; and other administrative and operating expenses decreased by RUB 467 million, or 14.2%, to RUB 2,827 million in the year ended December 31, 2016 from RUB 3,294 million in the year ended December 31, 2015.
Other operating income increased by RUB 1,232 million to RUB 1,407 million in the year ended December 31, 2016 from RUB 175 million in the year ended December 31, 2015 due to insurance compensation for long-lived assets loss and revision of pension obligations and rehabilitation provisions in our mining subsidiaries.
Steel segment
Selling and distribution expenses consisted almost entirely of transportation expenses related to our selling activities. Such expenses increased by RUB 1,656 million, or 12.1%, to RUB 15,392 million in the year ended December 31, 2016 from RUB 13,736 million in the year ended December 31, 2015, mainly due to the increase in railway tariffs by 9.0% and the increase in sales volumes of steel segment products. As a percentage of steel segment revenues, selling and distribution expenses slightly increased to 9.1% in the year ended December 31, 2016 from 9.0% in the year ended December 31, 2015.
Loss onwrite-off ofnon-current assets increased by RUB 597 million, or 121.3%, to RUB 1,089 million in the year ended December 31, 2016 from RUB 492 million in the year ended December 31, 2015, due to the increase in the number of idled property, plant and equipment written off by our steel production subsidiaries.
Impairment of goodwill and othernon-current assets increased by RUB 3,850 million, or 24,062.5%, to RUB 3,866 million in the year ended December 31, 2016 from RUB 16 million in the year ended December 31,
2015. In 2014, we recognized impairment of property, plant and equipment and construction in progress in relation to Izhstal of RUB 6,669 million. In 2015, we recognized reversal of impairment of othernon-current assets in relation to Izhstal of RUB 5,967 million and recognized additional impairment of othernon-current assets in relation to Mechel Materials of RUB 5,983 million. In 2016, we recognized impairment of goodwill and othernon-current assets in relation to Bratsk Ferroalloy Plant of RUB 3,627 million due to changes in expectations of long-term prices for ferrosilicon and in forecasted production volumes accompanied by the increased forecasted costs.
Provision for doubtful accounts decreased by RUB 717 million, or 75.6%, to RUB 231 million in the year ended December 31, 2016 from RUB 948 million in the year ended December 31, 2015, due to the decrease in overdue accounts receivable.
Taxes other than income taxes decreased by RUB 218 million, or 10.7%, to RUB 1,826 million in the year ended December 31, 2016 from RUB 2,044 million in the year ended December 31, 2015, mainly due to recognition of additional VAT in the amount of RUB 358 million as a result of tax audit in 2015. In 2016, we recognized probable tax risks in respect of penalties related to personal income tax in the amount of RUB 181 million. Property and land taxes increased by RUB 47 million to RUB 1,329 million in the year ended December 31, 2016 from RUB 1,282 million in the year ended December 31, 2015.
Administrative and other operating expenses increased by RUB 744 million, or 9.5%, to RUB 8,569 million in the year ended December 31, 2016 from RUB 7,825 million in the year ended December 31, 2015. Payroll and related social taxes increased by RUB 1,093 million, or 22.6%, to RUB 4,843 million in the year ended December 31, 2016 from RUB 3,750 million in the year ended December 31, 2015. Social expenses increased by RUB 10 million, or 4.7%, to RUB 225 million in the year ended December 31, 2016 from RUB 215 million in the year ended December 31, 2015. Rent and maintenance, business travel expenses, bank charges and office expenses increased by RUB 85 million, or 8.9%, to RUB 1,044 million in the year ended December 31, 2016 from RUB 959 million in the year ended December 31, 2015. Professional expenses, which include auditing, accounting, legal and engineering fees and insurance services increased by RUB 68 million, or 21.6%, to RUB 383 million in the year ended December 31, 2016 from RUB 315 million in the year ended December 31, 2015. Fines and penalties expenses on breach of trading contracts, provisions related to claims decreased by RUB 226 million, or 42.7%, to RUB 303 million in the year ended December 31, 2016 from RUB 529 million in the year ended December 31, 2015. Other administrative and operating expenses decreased by RUB 285 million, or 13.9%, to RUB 1,772 million in the year ended December 31, 2016 from RUB 2,057 million in the year ended December 31, 2015.
Other operating income increased by RUB 163 million, or 83.5%, to RUB 356 million in the year ended December 31, 2016 from RUB 193 million in the year ended December 31, 2015, mainly due to revision of rehabilitation provision and receipt of final consideration for the disposed companies.
Power segment
Selling and distribution expenses consisted almost entirely of electricity transmission costs incurred by our Kuzbass Power Sales Company for the usage of the power grid through which electricity is distributed to end consumers. These expenses increased by RUB 918 million, or 10%, to RUB 9,710 million in the year ended December 31, 2016 from RUB 8,792 million in the year ended December 31, 2015, due to increase in transmission tariffs despite the reduced sales volumes.
In 2015, as a result of the goodwill impairment test we recognized the impairment loss of Southern Kuzbass Power Plant in the amount of RUB 1,444 million. No impairment loss was recognized in 2016. See note 18 to the consolidated financial statements.
Provision for doubtful accounts increased by RUB 131 million to RUB 443 million in the year ended December 31, 2016 from RUB 312 million in the year ended December 31, 2015, mainly due to the increase in overdue receivables.
Taxes other than income taxes increased by RUB 26 million, or 25.5%, to RUB 129 million in the year ended December 31, 2016 from RUB 103 million in the year ended December 31, 2015, due to increase in property and land taxes caused by the revision of the cadastral valuation of land.
Administrative and other operating expenses increased by RUB 82 million, or 13.6%, to RUB 685 million in the year ended December 31, 2016 from RUB 603 million in the year ended December 31, 2015, due to accrual of provisions for legal claims.
Other operating income was recognized in the amount of RUB 91 million as a result of income from accrual of fines and penalties for business contracts.
Operating profit
Operating profit increased by RUB 18,438 million, or 76.0%, to RUB 42,690 million in the year ended December 31, 2016 from RUB 24,252 million in the year ended December 31, 2015. As a percentage of consolidated revenues, operating profit increased to 15.5% in the year ended December 31, 2016 from 9.6% in the year ended December 31, 2015, mainly due to an increase in consolidated gross profit to 47.0% in the year ended December 31, 2016 from 40.2% in the year ended December 31, 2015 and a decrease in losses from provision for doubtful accounts as explained above.
The table below sets out operating profit by segment, including as a percentage of segment revenues.
| Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||||||||||
Operating Profit by Segment | Amount | % of Segment Revenues | Amount | % of Segment Revenues | ||||||||||||
| (In millions of Russian rubles, except for percentages) | ||||||||||||||||
Mining segment | 31,012 | 25.5 | % | 16,005 | 14.7 | % | ||||||||||
Steel segment | 11,531 | 6.8 | % | 8,526 | 5.6 | % | ||||||||||
Power segment | 701 | 1.7 | % | 39 | 0.1 | % | ||||||||||
Elimination of intersegment unrealized profit(1) | (554 | ) | (318 | ) | ||||||||||||
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Consolidated operating profit | 42,690 | 24,252 | ||||||||||||||
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Mining segment
Mining segment operating profit increased by RUB 15,007 million, or 93.8%, to RUB 31,012 million in the year ended December 31, 2016 from RUB 16,005 million in the year ended December 31, 2015. The operating profit margin increased to 25.5% in the year ended December 31, 2016 from 14.7% in the year ended December 31, 2015, mainly due to the increase in selling prices caused by the global coal prices rally.
Steel segment
Steel segment operating profit increased by RUB 3,005 million, or 35.2%, to RUB 11,531 million in the year ended December 31, 2016 from RUB 8,526 million in the year ended December 31, 2015. The operating profit margin increased to 6.8% in the year ended December 31, 2016 from 5.6% in the year ended December 31,
2015, mainly due to the increase in gross margin resulted from the increase in sales prices for main steel segment products that was partially offset by recognition of losses from impairment of goodwill and othernon-current assets of Bratsk Ferroalloy Plant.
Power segment
Power segment operating profit increased by RUB 662 million to RUB 701 million in the year ended December 31, 2016 from RUB 39 million in the year ended December 31, 2015, mainly due to the factors that affected operating income in 2016, such as the absence of impairment loss of goodwill in 2016, increase in a provision on trade and other receivables and increase in income from accrual of fines and penalties for business contracts.
Other income and expense, net
Other income and expense, net consists of share of loss of an associate, finance income, finance costs, other income and other expenses and foreign exchange gain (loss). The table below sets forth these costs for the years ended December 31, 20162019 and 2015,2018, including as a percentage of revenues.
| Year Ended December 31, 2016 | Year Ended December 31, 2015 | Year Ended December 31, 2019 | Year Ended December 31, 2018 | |||||||||||||||||||||||||||||
Other Income and Expense, Net | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | Amount | % of Revenues | ||||||||||||||||||||||||
| (In millions of Russian rubles, except for percentages) | (In millions of Russian rubles, except for percentages) | |||||||||||||||||||||||||||||||
Finance income | 1,176 | 0.4 | % | 183 | 0.1 | % | 600 | 0.2 | % | 34,056 | 10.9 | % | ||||||||||||||||||||
Finance costs | (54,240 | ) | (19.7 | )% | (60,453 | ) | (23.9 | )% | (38,830 | ) | (13.1 | )% | (42,052 | ) | (13.5 | )% | ||||||||||||||||
Foreign exchange gain (loss) | 25,947 | 9.4 | % | (71,106 | ) | (28.1 | )% | 19,241 | 6.5 | % | (25,775 | ) | (8.2 | )% | ||||||||||||||||||
Share of loss of an associate | (17 | ) | 0.0 | % | — | 0.0 | % | |||||||||||||||||||||||||
Share of gain of an associate | 28 | 0.0 | % | 10 | 0.0 | % | ||||||||||||||||||||||||||
Other income | 598 | 0.2 | % | 341 | 0.1 | % | 239 | 0.1 | % | 512 | 0.2 | % | ||||||||||||||||||||
Other expenses | (1,999 | ) | (0.7 | )% | (347 | ) | (0.1 | )% | (504 | ) | (0.2 | )% | (314 | ) | (0.1 | )% | ||||||||||||||||
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Total | (28,535 | ) | (10.3 | )% | (131,379 | ) | (51.9 | )% | (19,226 | ) | (6.5 | )% | (33,563 | ) | (10.7 | )% | ||||||||||||||||
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Finance income increaseddecreased by RUB 99333,456 million, or 542.6%98.2%, to RUB 1,176600 million in the year ended December 31, 20162019 from RUB 18334,056 million in the year ended December 31, 2015,2018, due to waiving of fines and penalties on loans and finance leasesa decrease in gain recognized as a result of debt restructuring primarily with Sberbank.and refinancing.
Finance costs decreased by RUB 6,2133,222 million, or 10.3%7.7%, to RUB 54,24038,830 million in the year ended December 31, 20162019 from RUB 60,45342,052 million in the year ended December 31, 2015,2018, due to the restructuring of overdue borrowings and respectivea decrease in finesinterest rates and penalties.repayment of loans in 2019.
In the year ended December 31, 2016,2019, we generated foreign exchange gain amounted toof RUB 25,94719,241 million compared to foreign exchange loss amounted toof RUB 71,10625,775 million in the year ended December 31, 2015,2018, mainly due to strengthening of the Russian ruble against the U.S. dollar and euro in 2016.2019.
Share of loss of an associate amountedOther income decreased by RUB 273 million, or 53.3%, to RUB 17239 million in the year ended December 31, 2016 compared to2019 from RUB nil in the year ended December 31, 2015 and represented by income in the amount of RUB 25 million from equity investment in Tomusinsky Transportation Management Center and Tomusinsky Auto Repair Shop and loss in the amount of RUB 42 million from investments in Mechel Somani Carbon Private Limited.
Other income increased by RUB 257 million, or 75.4%, to RUB 598512 million in the year ended December 31, 2016 from RUB 341 million in the year ended December 31, 2015,2018, mainly due to gain realized from disposala decrease inwrite-off of subsidiaries during 2016.trade and other payables with expired legal term.
Other expenses increased by RUB 1,652190 million, or 476.1%60.5%, to RUB 1,999504 million in the year ended December 31, 20162019 from RUB 347314 million in the year ended December 31, 2015, mainly due towrite-off of Vnesheconombank’s commission in the amount of RUB 1,411 million and recognition of provision fornon-recoverable advances to pension funds in the amount of RUB 408 million.2018.
Income tax expense
Income tax expense decreasedincreased by RUB 3,4295,306 million, or 41.2%197.9%, to RUB 4,8937,987 million in the year ended December 31, 20162019 from RUB 8,3222,681 million in the year ended December 31, 2015, due to significant change in deferred tax assets attributable to transactions on conversion of debt.2018. Our effective tax rate changedincreased to negative 34.6%65.1% from positive 7.8% mainly16.5% due to transition from lossan increase in deferred tax expense as a result of extension of limitations for utilization of deferred tax assets on tax losses in the year ended December 31, 2015 to profit in the year ended December 31, 2016.
Net loss (income) from discontinued operations
Net loss (income) from discontinued operations changed by RUB 1,248 million, or 151.8%, to RUB 426 million loss in the year ended December 31, 2016 from RUB 822 million income in the year ended December 31, 2015, mainly due to the disposalconsolidated group of Bluestone in 2015.taxpayers.
Net profit attributable tonon-controlling interests
Net profit attributable tonon-controlling interests increased by RUB 1,171968 million, or 218.9%106.6%, to RUB 1,7061,876 million in the year ended December 31, 20162019 from RUB 535908 million in the year ended December 31, 2015,2018, mainly due to change in net profit attributable tonon-controlling interestsprofits in respective subsidiaries such our subsidiaries as Southern Kuzbass Coal Company and its subsidiaries in the amount of RUB 1,082 million (profit), Chelyabinsk Metallurgical Plant, in the amount of RUB 625.2 million (profit), Korshunov Mining Plant, in the amount of RUB 119 million (profit), Izhstal in the amount of RUB 371.5 million (loss)Kuzbass Power Sales Company and Beloretsk Metallurgical Plant in the amount of RUB 146 million (loss).Izhstal.
Net profit (loss) attributable to equity holders of the parent
Net profit (loss) attributable to our equity holders changeddecreased by RUB 122,28910,219 million, or 106.2%80.9%, to RUB 7,1262,409 million profit in the year ended December 31, 20162019 from RUB 115,16312,628 million loss in the year ended December 31, 2015,2018, mainly due to the increase in gross margin and foreign exchange gain and partially due to the decrease in finance costs.income, gross margin and effect of foreign exchange difference.
Year ended December 31, 2018 compared to year ended December 31, 2017
This analysis can be found in Item 5 of our annual report on Form20-F for the year ended December 31, 2018.
Liquidity and Capital Resources
Capital requirements
We expect that our principal capital requirements in the near future will be for financing the repayment of maturing debt, interest payments and regular maintenance capital expenditures.
Our business is heavily dependent on machinery for the production of steel and steel products, as well as investments in our mining operations. Investments to maintain and expand production facilities are, accordingly, an important priority and have a significant effect on our cash flows and future results of operations. We intend to focus our capital spending on the implementation of projects that we view as key to carrying out our business strategy and improve free cash flow. See “Item 4. Information on the Company — Capital Investment Program” for the objectives of our capital investment program and its details. Over the next three years, i.e., 2018-2020,2020-2022, we expect our overall capital expenditures on our metals production facilities to total approximately 5.9RUB 28.0 billion, rubles, approximately 78%66% of which will be in 2018-2019,2020-2021 and approximately 22%34% in 2020. We intend to spend approximately 6.7 billion rubles for the development of the Elga coal deposit during the period from 2018 to 2020.2022. We intend to finance our capital investments with cash flow from operations and external long-term financing sources.
Our total outstanding debt as of December 31, 20172019 and 20162018 was RUB 439,893388,522 million and RUB 445,809418,832 million, respectively. SeeFor a description of our loans and borrowings, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk” for information regardingand note 10.1 to the type ofconsolidated financial instruments, currency and interest rate structure.statements.
In 20172019 and 2016,2018, we paid dividends on preferred shares of RUB 855.61,514.8 million and RUB 4.11,386.1 million, respectively. In each case we could not pay insignificant amountamounts of dividends on certain sharesto those shareholders who did not
provide us with their bank account details and/or due to the restriction of minority shareholders’ rights to receive dividends in certain cases provided for by Russian law. See “Item 8. Financial Information — Dividend Distribution Policy” for a description of our dividend policy.
Capital resources
Our strategy has shifted from growing our business through acquisition and expansion opportunities to extracting the maximum value from our existing core assets. We now intend to concentrate on efficiency improvements and modernization of the business lines, which we expect will increase the business’ overall profitability. We may also consider further selective disposal of assets.
Historically, our major sources of cash have been cash generated from operations, bank loans and public debt, and we expect these sources will continue to be our principal sources of cash in the future. For financing of our capital investment program we have also relied on financings secured by foreign export credit agency guarantees. We do not useoff-balance sheet financing arrangements.
The table below summarizes our cash flows for the periods indicated.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||
| 2017 | 2016 | 2015 | 2019 | 2018 | ||||||||||||||||
| (In millions of Russian rubles) | (In millions of Russian rubles) | |||||||||||||||||||
Net cash provided by operating activities | 63,282 | 53,207 | 38,867 | 57,658 | 68,118 | |||||||||||||||
Net cash used in investing activities | (7,138 | ) | (4,969 | ) | (5,218 | ) | (5,921 | ) | (5,647 | ) | ||||||||||
Net cash used in financing activities | (55,737 | ) | (45,869 | ) | (34,433 | ) | (48,357 | ) | (63,286 | ) | ||||||||||
Net cash provided by operating activities was RUB 63,28257,658 million in the year ended December 31, 20172019 as compared to RUB 53,20768,118 million in the year ended December 31, 2016 and RUB 38,867 million in the year ended December 31, 2015.2018. The operating cash inflows were derived from payments received from sales of our mining, steel and power products, reduced by cash disbursements for direct labor, raw materials and parts, selling, distribution and operating expensesincome and (expenses), net and income taxes.
Net cash from operating activities before changes in working capital items was RUB 72,27949,282 million in the year ended December 31, 2017.2019. Income taxes paid amounted to RUB 4,5302,735 million. Below we analyze major changes in working capital items which in the aggregate accounted for RUB 4,46711,111 million in cash received from operating activities, resulting in net cash provided by operating activities of RUB 57,658 million.
Working capital items accretive to operating cash flows:
a decrease in accounts receivable of RUB 1,546 million due to the increase of turnover of accounts receivable;
an increase in accounts payable of RUB 4,037 million of Southern Kuzbass Coal Company, Mechel Materials, Yakutugol, Mechel Coke, Mechel Energo and Chelyabinsk Metallurgical Plant;
an increase in advances received of RUB 650 million of Chelyabinsk Metallurgical Plant, Mechel Service and Mechel Carbon;
an increase in accrued taxes and other liabilities of RUB 5,151 million mainly due to change in tax liabilities; and
a decrease in other assets of RUB 1,238 million primarily due to a decrease in advances paid mainly by Mechel Carbon, Mecheltrans and Yakutugol.
Working capital items reducing operating cash flows:
an increase in inventories of RUB 1,511 million mainly due to an increase in finished goods of Southern Kuzbass Coal Company, Yakutugol and Mechel Coke as of December 31, 2019 as compared to December 31, 2018.
Net cash from operating activities before changes in working capital items was RUB 73,717 million in the year ended December 31, 2018. Income taxes paid amounted to RUB 3,562 million. Below we analyze major changes in working capital items which in the aggregate accounted for RUB 2,037 million in cash used in operating activities, resulting in net cash provided by operating activities of RUB 63,28268,118 million.
Working capital items attributableaccretive to operating cash flows:
a decrease in accounts receivable of RUB 1,354 million due to the increase of turnover of accounts receivable;
an increase in accounts payable of RUB 4,150 million of Yakutugol, Southern Kuzbass Coal Company, Elgaugol and Mecheltrans;
an increase in advances received of RUB 625485 million mainly of Chelyabinsk Metallurgical Plant, Kuzbass Power Sales CompanyUrals Stampings Plant; and Izhstal due to growth of sales in the year ended December 31, 2017 as compared to the year ended December 31, 2016; and
an increase in accrued taxes and other liabilities of RUB 4,064683 million mainly due to change in tax liabilities.
Working capital items reducing operating cash flows:
an increase in other current assets of RUB 895 million primarily due to an increase in VAT on advances received mainly by Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant and Southern Kuzbass Coal Company.
Net cash from operating activities before changes in working capital items was RUB 64,542 million in the year ended December 31, 2016. Net operating cash outflow of discontinued operations amounted to RUB 436 million. Income taxes paid amounted to RUB 2,101 million. Below we analyze major changes in working capital items which in the aggregate accounted for RUB 8,798 million in cash used in operating activities, resulting in net cash provided by operating activities of RUB 53,207 million.
Working capital items accretive to operating cash flows:
Working capital items reducing operating cash flows:
Net cash from operating activities before changes in working capital items was RUB 43,227 million in the year ended December 31, 2015. Net operating cash outflow of discontinued operations amounted to RUB 136 million. Income taxes paid amounted to RUB 1,437 million. Below we analyze major changes in working capital items which in the aggregate accounted for RUB 2,787 million in cash used in operating activities, resulting in net cash providedmainly by operating activities of RUB 38,867 million.
Working capital items accretive to operating cash flows:
Carbon.
Working capital items reducing operating cash flows:
Net cash used in investing activities was RUB 7,1385,921 million in the year ended December 31, 20172019 as compared to RUB 4,9695,647 million in the year ended December 31, 2016 and RUB 5,218 million in the year ended December 31, 2015.2018. Substantially all of the cash used in investing activities in the years ended December 31, 2017, 20162019 and 20152018 related to capital expenditures. Capital expenditures relating to purchases of property, plant and equipment purchases of mineral licenses and interest paid, capitalized amounted to RUB 7,047 million, RUB 5,5246,538 million and RUB 5,9775,912 million in the years ended December 31, 2017, 20162019 and 2015,2018, respectively. Expenditures related to purchasesPurchases of intangible assets amounted to RUB 771nil in the year ended December 31, 2019 as compared to RUB 150 million in the year ended December 31, 2017 compared to RUB nil in the years ended December 31, 2016 and 2015.2018. Cash provided by investing activities related to disposal of businesses and investments amounted to RUB 568 million, RUB 24817 million and RUB 1773 million in the years ended December 31, 2017, 20162019 and 2015,2018, respectively. Proceeds from loans issued and other investments amounted to RUB 313 million and RUB 9 million in the years ended December 31, 2019 and 2018, respectively.
Net cash used in financing activities was RUB 55,73748,357 million in the year ended December 31, 20172019 as compared to RUB 45,86963,286 million in the year ended December 31, 2016 and RUB 34,433 million in the year ended December 31, 2015.2018. Expenditures related to deferred consideration payments amounted to RUB 4,107 million, RUB 4,732702 million and RUB 4,8194,597 million in the years ended December 31, 2017, 20162019 and 2015,2018, respectively. We received debtDebt proceeds ofamounted to RUB 23,2007,599 million and we repaid debt of RUB 35,03320,772 million in the year ended December 31, 20172019 as compared to received debt proceeds of RUB 4,00276,504 million and proceeds from the salerepayment of a 49% stake in the Elga coal complex, with a put option granted of RUB 34,300 million and repaid debt of RUB 42,32297,269 million in the year ended December 31, 2016 and received debt proceeds2018.
Comparison of RUB 13,875 million and repaid debt of RUB 11,896 million inour results for the year ended December 31, 2015.2018 with the year ended December 31, 2017 can be found in Item 5 of our annual report on Form20-F for the year ended December 31, 2018.
Liquidity
We had cash and cash equivalents of RUB 2,452 million, RUB 1,6893,509 million and RUB 3,0791,803 million as of December 31, 2017, 20162019 and 2015,2018, respectively. Our cash and cash equivalents were held in rubles (25.3%, 40.9%(48.7% and 20.6%20.0% as of December 31, 2017, 20162019 and 2015,2018, respectively), U.S. dollars (56.2%, 28.5%(30.4% and 37.4%42.1% as of December 31, 2017, 20162019 and 2015,2018, respectively), euros (12.5%, 23.9%(18.2% and 37.6%32.3% as of December 31, 2017, 20162019 and 2015,2018, respectively) and other currencies.
The unused portion under the group’s credit facilities as of December 31, 2017, 20162019 and 20152018 was RUB 475 million, RUB 373514 million and RUB 409573 million, respectively. As of December 31, 2017, 20162019 and 2015,2018, the group’s credit facilities provided aggregated borrowing capacity of RUB 465,368389,036 million (of which RUB 101,668152,650 million is repayable during 20182020 and RUB 284,156220,046 million represented long-term debt that was reclassified as short-term liabilities as of that date because of covenant violations), RUB 446,181 million and RUB 496,390419,405 million, respectively. The group’s borrowings under these credit facilities (except for special-purpose borrowings such aspre-export facilities, syndicated loan for refinancing ofpre-export facilities, Vnesheconombank’s facility as well as factoring and overdraft facilities) carried a weighted average interest rate of approximately 9.7%, 10.3%8.6% and 15.0%8.6% as of December 31, 2017, 20162019 and 2015,2018, respectively. See “— Restrictive Covenants” for further information about our covenant violations.
The following table summarizes our liquidity as of December 31, 2017, 20162019 and 2015.2018.
| Year Ended December 31, | ||||||||||||||||||||
Estimated Liquidity | December 31, 2017 | December 31, 2016 | December 31, 2015 | 2019 | 2018 | |||||||||||||||
| (In millions of Russian rubles) | (In millions of Russian rubles) | |||||||||||||||||||
Cash and cash equivalents | 2,452 | 1,689 | 3,079 | 3,509 | 1,803 | |||||||||||||||
Amounts available under credit facilities | 475 | 373 | 409 | 514 | 573 | |||||||||||||||
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Total estimated liquidity | 2,927 | 2,062 | 3,488 | 4,023 | 2,376 | |||||||||||||||
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Short-term debt (short-term borrowings and current portion of long-term debt) decreased by RUB 11,63130,977 million, or 2.7%7.5%, to RUB 422,533381,317 million as of December 31, 20172019 from RUB 434,165412,294 million as of December 31, 2016,2018, as a result of strengthening of the ruble against the U.S. dollar and partial repayment of current debt and Vnesheconombank’s facility refinancing.debt.
Long-term debt net of current portion increased by RUB 5,716667 million, or 49.1%10.2%, to RUB 17,3607,205 million as of December 31, 20172019 from RUB 11,6446,538 million as of December 31, 2016,2018. As of December 31, 2019, we were in compliance with the covenants under certain credit agreements and the respective debt was classified as a resultlong-term, while, as of Vnesheconombank’s facility refinancing.December 31, 2018, the respective debt was classified as short-term due to covenants violation. The increase in long-term debt was partially offset by the maturity of the bonds.
Our working capital remained negative but the deficit during the year decreased by RUB 24,89510,648 million, or 5.6%2.6%, to RUB 416,686393,407 million as of December 31, 20172019 from RUB 441,581404,055 million as of December 31, 2016.2018. The main reason for decrease in working capital deficit was reduction of financial indebtedness as a result of the Russian ruble appreciation and repayment of our debts and trade and other payables.debts.
Comparison of our results for the year ended December 31, 2018 with the year ended December 31, 2017 can be found in Item 5 of our annual report on Form20-F for the year ended December 31, 2018.
Restructuring of financial indebtedness
In the first half of 2014, we experienced a shortage of liquidity and difficulties with refinancing of our debt; as a result, we failed to fulfill our payment obligations in connection with the servicing of interest and the repayment of our indebtedness. Since 2014, we negotiatehave negotiated restructuring terms with our major Russian lenders, such as Gazprombank, Sberbank and VTB Bank, and other lenders. As a result, in August, September
and December 2015, we signed agreements with VTB Bank and Gazprombank contemplating, among other things, extension of the loan tenors, decrease in the interest rates, revision of the collateral requirements and dismissal of all court proceedings. During the period from December 2015 to April 2016, we signed agreements with Sberbank contemplating, among other things, extension of the loan tenors, decrease in the interest rates and dismissal of all court proceedings. These agreements were conditional upon certain undertakings, which we have managed to fulfill. See “— Debt Financings in 2016,” “— Debt Financings in 2015,” “— Description of Certain Indebtedness,”Indebtedness” and “Item 10. Additional Information — Material Contracts” and “Item 8. Financial Information — Litigation — Debt litigation.Contracts.”
VTB Bank restructuring became effective in October 2015. Gazprombank restructuring became partially effective in the first quarter of 2016 after conversion of the U.S. dollar-denominated credit facilities into Russian rubles. Restructuring under all facilities with Gazprombank became effective in June 2016 after obtainment ofobtaining approval on the suretyship provision by Mechel onat our general shareholders’ meeting. Restructuring agreements with Sberbank came into effect upon signing. In April 2016, Southern Kuzbass Coal Company’s debt was assigned from Sberbank to Gazprombank in the amount of 31.5 billion rubles ($423.1 million or 28.4 billion rubles at the CBR exchange rate on April 12, 2016 and 3.1 billion rubles).
In April 2016, we signed option agreements with Gazprombank providing the bank with an option to acquire a 49% stake in the Elga coal complex for a total consideration of 34.3 billion rubles. According to these agreements, in June 2016, we sold to Gazprombank a 49% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 49% stake in Elga-road OOO, the owner of the Ulak-Elga rail line which had been contributed to the registered capital of this newly established company in March 2016, and a 49% stake in MecheltransVostok OOO, the rail line’s transport operator (collectively, the “target companies”). All proceeds from the sale of these stakes were used for repayment of our debt to Gazprombank, Sberbank and Sberbank
Leasing AO. Gazprombank has a put option to sell its stakes (in full or in part) in the Elga coal complex within three years following a five-year period or in case of a breach of conditions stipulated by such agreement. Put options were signed by Yakutugol and Mecheltrans (sellers of the stakes in the target companies) and are guaranteed by Mechel Mining and Southern Kuzbass Coal Company. If we fail to perform our obligations under these put options Gazprombank will have the right,inter alia, to buy out (call option) the remaining stakes owned by us in the target companies. A 1.99% stake in each of the target companies is pledged in favor of Gazprombank as a security for the call option.
In December 2016, we signed the last set of the agreements with VTB Bank which provide for extension of maturity of our credit lines until April 2022. In April 2017, Gazprombank, VTB Bank and Sberbank confirmed the restructuring terms, including an extension of the repayment grace period until 2020 and the final maturity until 2022, interest rate of the CBR key rate plus 1.5% per year for ruble-denominated credit facilities and 3M LIBOR plus 7% per year for U.S. dollar-denominated credit facilities, and partial capitalization of interest payments.
As part of the restructuring, in January 2017, VTB Capital Plc and Skyblock Limited entered into a call option agreement for 6,937,846 preferred shares representing 5% of issued preferred shares in the share capital of Mechel (the “option shares”), which we have pledged in favor of VTB Capital Plc to secure performance of our obligations under the call option agreement. The strike price is 47.3682 rubles per share. Initially, VTB Capital Plc had a right to exercise this call option during the period from April 1, 2017 to December 31, 2020. In April 2017, VTB Capital Plc exercised its option right to buy all option shares, but we have requested to extend the start date of the option period by one year until April 1, 2018. Skyblock Limited did not fulfill its obligations under the option notice. In August 2017, VTB Capital Plc and Skyblock Limited entered into an amendment agreement postponing the option period start date until April 1, 2018, revoking the option notice and granting VTB Capital Plc the right to receive a cash sum equal to the higher of RUB 620 million or the amount calculated as a difference between the weighted average market value of preferred shares for the last six months prior to the date of delivery of the option notice and the number of option shares multiplied by the strike price.
In September 2017, Vnesheconombank refinanced our existing indebtedness under the project financing for the development of the Elga coal deposit. The loan provides for final repayment in April 2022.
In September 2015,July 2018, we restructuredsigned a new euro-denominated loan agreement with VTB Bank to refinance existingpre-export credit facilities with a syndicate of banks. As of December 31, 2018, we had refinanced 99.99% of thepre-export facilities by using funds attracted under the new loan. In January 2019, thepre-export facilities were fully refinanced.
In November 2019, Sberbank assigned our debt under two seriesand related security to VTB Bank.
Our current debt repayment schedule, which was agreed with our major Russian lenders in the course of previous restructuring, provides for full debt repayment during the period of 2020-2022. We may not have sufficient funds to meet this debt repayment schedule. In the second half of 2019, we have entered into negotiations with our major Russian ruble bondslenders in an aggregate amountorder to extend maturities of 10.0 billion rubles. In June-July 2016,our outstanding debt and to reduce
our annual principal payments. However, we restructuredhave not agreed the debt under four series of Russian ruble bonds in an aggregate amount of approximately 18.4 billion rubles. See “— Description of Certain Indebtedness” for a descriptionkey terms of the terms of restructuring.
During the period from December 2015restructuring and there is no clarity as to May 2016, we signed settlementwhen and if any binding agreements with Sberbank Leasing AO which waived our previous defaults and restructured our future payment schedules. The settlement agreements were approved by the courtwill be entered into in March-September 2016. In November 2016 and February 2017, we signed settlement agreements with VTB Leasing JSC which restructured our overdue payments. The settlement agreements became effective upon approval by the court in January-April 2017. During 2017, Caterpillar Financial OOO restructured part of our overdue lease payments by means of settlement agreements which were approved by the courts.relation thereto.
We continue to negotiate financial restructuring with international lenders under our international lenders. In December 2017, we entered into alock-up agreement with a majority ofpre-exportexport credit facility lenders in order to facilitate the restructuring. Preliminary restructuring terms include an extension of the final maturity to the first quarter of 2022 and reduction of interest rate to the level of LIBOR plus a margin of 3.5% per year (with a possibility of further margin reduction to 3%).agreements.
Outlook for 20182020
Our objective is to ensure that our group meets its liquidity requirements and payment obligations to creditors, continues capital expenditures, properly services its debt, restructuresagrees on the remaining partnew restructuring terms of the
indebtedness with international lenders, outstanding debt and continues as a going concern. To accomplish that,
We plan to restructure our financial obligations and provide sufficient funding to conduct operating activities, implement our capital investment program and service the restructured debt in full to all creditors under the new repayment schedules.
Although we will continue to seek the restructuring of our existingnon-restructured indebtedness in order to alleviate the pressure on our cash flows. We intend to makehave a long-term restructuring of our debt portfolio with repayment grace periods which will allow us to restorenegative working capital, improve efficiency of operations and provide ability to make full service of debt in accordance with new repayment schedules as well as use all available free cash flow for repayment of debt through cash sweep mechanism.
We believe we will not be able to obtain significant new borrowings in the near future; however we may consider certain divestments and invite financial or strategic investors into our businesses in order to reduce the debt burden. We believe that cash generated from operations, subject to successful completion of debt restructuring, improved market conditions and reduced costs, will be sufficient to meet our capital expenditures and debt service payments in 2018.2020. Furthermore, we believe that we have the flexibility in deferring ournon-critical capital expenditures and in managing our working capital to provide further financial flexibility as needed.
We believe we will not be able to obtain significant new borrowings in the near future (except for the purpose of refinancing of current liabilities); however we may consider certain divestments in order to reduce our debt burden.
Debt Financings in 20182020
We have not entered into new material debt financingsfinancing as of the date hereof. For developments relating to existing financings, please refer tofinancing, see “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
Debt Financings in 2019
In November 2019, Sberbank assigned the debt totaling approximately 27.2 billion rubles and $340.9 million under the credit facilities with Chelyabinsk Metallurgical Plant, Southern Kuzbass Coal Company and Bratsk Ferroalloy Plant to VTB Bank. The penalties in the total amount of approximately 182.2 million rubles and $6.0 million under the above credit facilities remained with Sberbank to be paid on April 10, 2022. The Bratsk Ferroalloy Plant’s credit facility was fully repaid in January 2020.
Debt Financings in 2018
In July 2018, Chelyabinsk Metallurgical Plant entered into a syndicated credit facility agreement with VTB Bank and VTB Bank (Europe) SE for a total amount of up to €950.0 million to refinance the Yakutugol and Southern Kuzbass Coal Companypre-export facilities. The grace period for principal repayment is granted until April 2020. The final maturity of the credit facility is in April 2022. See “Item 10. Additional Information — Material Contracts.”
Debt Financings in 2017
In September 2017, our subsidiary Elgaugol and Vnesheconombank entered into a credit facility agreement for a total amount of up to $190.0 million to refinance our debt obligations under the project financing for the development of the Elga coal deposit. See “— Description of Certain Indebtedness.”
In April 2017, the $100.0 million credit facility obtained by Mechel Trading from Sberbank was assigned to VTB Bank. The terms and conditions of the facility agreement remained unchanged, except for the security package which was not assigned.
Debt Financings in 2016
During the course of 2016, we managed to reach further agreement with VTB Bank which agreed to extend the final maturity of the loans until 2022 (similarly to Gazprombank and Sberbank), finalized the restructuring of Russian ruble bonds, signed settlement agreements with Sberbank which assigned part of Sberbank’s debt to Gazprombank and finalized the restructuring with Gazprombank. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
In December 2016, Yakutugol, Southern Kuzbass Coal Company and Chelyabinsk Metallurgical Plant signed amendments to their credit facility agreements with VTB Bank totaling approximately 25.4 billion rubles (approximately $419.9 million as of December 31, 2016) which provide for an extension of the repayment grace period until April 2020 and the final maturity until April 2022.
In December 2016, Mechel signed an amendment to its credit facility agreement with VTB Bank totaling 44.8 billion rubles (approximately $738.1 million as of December 31, 2016) which provides for an extension of the repayment grace period until April 2020 and the final maturity until April 2022. In addition, in December 2016, Chelyabinsk Metallurgical Plant entered into a credit facility agreement with VTB Bank with a credit limit of 30.0 billion rubles (approximately $494.6 million as of December 31, 2016) to refinance Mechel’s debt under the credit facility agreement with VTB Bank. The facility also has a grace period until April 2020 and the final maturity until April 2022.
In June-July 2016, we restructured the debt under Russian bonds of the 04, 17, 18 and 19 series in the aggregate amount of approximately 18.4 billion rubles.
In June 2016, our subsidiaries amended their credit facility agreements with Gazprombank to capitalize accrued and unpaid interests. We repaid these amounts and interests accrued on them during the period from April 15, 2017 to March 30, 2018.
In April 2016, Southern Kuzbass Coal Company signed new settlement agreements with Sberbank which assigned part of the principal amount to Gazprombank. The principal amounts of $423.1 million and 3.1 billion rubles were assigned to Gazprombank and $254.9 million remained with Southern Kuzbass Coal Company under credit facilities with Sberbank. The remaining debt was restructured with extension of grace period and final repayment, new interest rates and levels of financial covenants.
In March 2016, Yakutugol’s loan from Gazprombank in the amount of $103.1 million was converted into rubles resulting in the debt of 6.9 billion rubles. Restructuring of this credit facility became effective.
In February 2016, we signed restructuring agreements with Sberbank for Chelyabinsk Metallurgical Plant, Izhstal, Bratsk Ferroalloy Plant, Yakutugol, Korshunov Mining Plant, Mechel Trading and Southern Kuzbass Coal Company facilities totaling approximately 29.3 billion rubles and $100.0 million. Restructuring granted an extension of grace period and final maturity, new interest rates, partial capitalization of interests, as well as new levels of financial covenants.
In January 2016, part of Gazprombank debt, namely $400.0 million and $200.0 million credit facilities for Southern Kuzbass Coal Company and $385.8 million and $300.0 million credit facilities for Yakutugol were converted into rubles resulting in the total debt of approximately 99.0 billion rubles. Restructuring of these converted facilities became effective.
Debt Financings in 2015
During the course of 2015, we managed to reach an agreement with a part of our major creditors such as VTB Bank, Gazprombank, Sberbank and some others on the restructuring of the group’s loan agreements including but not limited to the extension of the tenor of the loans, partial capitalization of interest payments, extension of the grace period and change of the interest rate calculation. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
In December 2015, Southern Kuzbass Coal Company signed settlement agreements with Sberbank on the credit facilities in the total amount of approximately $678.0 million and 3.1 billion rubles. Upon approval of these agreements by the court, all debt under Southern Kuzbass Coal Company facilities became due and payable. In April 2016, new settlement agreements with Sberbank were signed and approved by the court.
In August and December 2015, Mechel Service, Chelyabinsk Metallurgical Plant, Mechel Energo, Beloretsk Metallurgical Plant, Port Posiet, Mechel Coke and Urals Stampings Plant signed amendments to their credit facility agreements with Gazprombank for a total amount of 26.8 billion rubles (approximately $367.3 million as of December 31, 2015), providing for an extension of the grace period until June 2020 and the final maturity until April 2022. The extension was subject to fulfillment of certain conditions. In June 2016, restructuring of these credit facilities became effective.
In August and December 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with Gazprombank to restructure debt in a total amount of approximately $1.3 billion (approximately 93.7 billion rubles as of December 31, 2015), providing for an extension of the grace period until January 2020 and the final maturity until April 2022, as well as the conversion into Russian rubles. The extension was subject to fulfillment of certain conditions. Restructuring of these credit facilities became effective in January 2016.
In August and December 2015, Yakutugol signed amendments to its credit facility agreement with Gazprombank to restructure debt totaling $103.1 million (approximately 7.5 billion rubles as of December 31, 2015), providing for an extension of the grace period until March 2020 and the final maturity until April 2022, as well as the conversion into Russian rubles. The extension was subject to fulfillment of certain conditions. Restructuring became effective upon conversion of the loan amount in March 2016.
In November 2015, Mechel Service signed amendments to its credit facilities with Moscow Credit Bank to restructure debt in the total amount of $83.3 million, providing for an extension of the final maturity until February 2017. In December 2016, the final maturity was extended until December 2019.
In September 2015, we restructured the debt under Russian bonds of the 13 and 14 series in the aggregate amount of 10.0 billion rubles.
In September 2015, Chelyabinsk Metallurgical Plant entered into an approximately 8.0 billion ruble (as calculated based on the market spot rate as of October 27, 2015) credit facility agreement with VTB Bank to refinance debts of Skyblock Limited and HBL Holding GmbH totaling $107.7 million and €14.5 million, respectively, provided by VTB Bank. The facility had a grace period until April 2017 and the final maturity until April 2020. In December 2016, Chelyabinsk Metallurgical Plant signed an amendment which provides for an extension of the grace period until April 2020 and the final maturity until April 2022.
In September 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with VTB Bank to restructure debt in the total amount of 15.8 billion rubles (approximately $217.1 million as of December 31, 2015), providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The restructuring came into effect on October 13, 2015. In December 2016, we signed amendments which provide extension of the repayment grace period and the final maturity.
In September 2015, Southern Kuzbass Coal Company signed an amendment to its credit facility agreement with VTB Bank to restructure debt totaling 1.6 billion rubles (approximately $22.6 million as of December 31, 2015), providing for an extension of the repayment grace period until April 6, 2017 and the final maturity until April 6, 2020. The restructuring came into effect on October 13, 2015. In December 2016, we signed an amendment which provides extension of the repayment grace period and the final maturity.
In September 2015, Mechel signed an amendment to its credit facility agreement with VTB Bank to restructure debt in the total amount of 44.8 billion rubles (approximately $614.3 million as of December 31, 2015), providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The restructuring came into effect on October 13, 2015. In December 2016, we signed an amendment which provides extension of the repayment grace period and the final maturity.
In September 2015, Yakutugol signed a settlement agreement with Eurasian Development Bank to restructure debt in the amount of approximately 1.9 billion rubles (approximately $25.5 million as of December 31, 2015). The final maturity of the credit facility agreement is extended until June 2018.
Debt Financings in 2014
During the course of 2014, we obtained or amended the following major debt financings. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
In July 2014, Yakutugol and Southern Kuzbass Coal Company entered into amendments to their credit facility agreements with VTB Bank to refinance debt in the total amount of 15.8 billion rubles (approximately $281.3 million as of December 31, 2014), providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018. The loan was restructured in October 2015.
In May 2014, Mechel entered into an amendment to its credit facility agreement with VTB Bank to refinance debt in the amount of 40.0 billion rubles (approximately $711.0 million as of December 31, 2014), providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018. VTB Bank also provided an additional loan for redemption of ruble bonds in the amount of up to 3.8 billion rubles (approximately $67.3 million as of December 31, 2014). The loan was restructured in October 2015.
In May 2014, Southern Kuzbass Coal Company entered into an amendment to its facility agreement with VTB Bank to refinance debt in the amount of 1.6 billion rubles (approximately $28.4 million as of December 31, 2014), providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018. The loan was restructured in October 2015.
In March 2014, our subsidiary Elgaugol signed two loan agreements for an aggregate amount of $2.5 billion with Vnesheconombank for the project financing of the development of the Elga coal deposit. In September 2017, the project financing was terminated with the existing indebtedness being refinanced by Vnesheconombank.
Debt Financings in 2013
During the course of 2013, we continued our refinancing efforts through extending some of our existing credit facilities, amending financial covenants, including agreeing with the lenders on a covenant holiday for Mechel and Mechel Mining’s ratios of Net Borrowings to EBITDA for the relevant periods ending on December 31, 2013 and June 30, 2014. See “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
In December 2013, our subsidiaries Yakutugol and Southern Kuzbass Coal Company and a syndicate of banks coordinated by ING Bank N.V., Société Générale and VTB Capital Plc entered into amendment agreements to the existingpre-export facility agreements for a total amount of $1.0 billion. The amendments provide that the loan, which was entering the repayment phase in December 2013, is to be repaid in equal monthly installments until December 2016 following a grace period of 12 months ending in December 2014.
In December 2013, several of our subsidiaries and Sberbank entered into separate amendments to their loan agreements totaling 26.6 billion rubles (approximately $808 million) for the restructuring and refinancing of existing indebtedness and working capital. Of this amount, Chelyabinsk Metallurgical Plant accounted for 21.5 billion rubles (approximately $655.9 million) and Mechel Trading, Izhstal, Southern Kuzbass Coal Company, Yakutugol, Korshunov Mining Plant and Bratsk Ferroalloy Plant accounted for, in the aggregate, 5.1 billion rubles (approximately $156.2 million). The facilities totaling 13.4 billion rubles (approximately $410.7 million) had a tenor of five years with a repayment grace period until March 28, 2015. In February and March 2016, our subsidiaries signed restructuring agreements with Sberbank.
In October 2013, our subsidiary Elgaugol and Vnesheconombank entered into a $150.0 million bridge loan with a tenor of six months for the development of the Elga coal deposit. In September 2017, our debt obligations under the bridge loan were refinanced.
In August 2013, Chelyabinsk Metallurgical Plant entered into a revolving credit facility with Alfa-Bank for a total amount of $150.0 million. The facility was provided for working capital financing and was fully drawn as of December 31, 2013. In March 2014, the credit facility was amended providing for full repayment of the loan in five equal weekly installments, the last installment falling due not later than April 25, 2014. In April 2014, the facility was fully repaid.
In April 2013, Mechel entered into a 40.0 billion ruble (approximately $1.3 billion) credit facility agreement with VTB Bank for a period of five years. The facility allowed a15-month grace period and was to be repaid in equal installments on a quarterly basis. The proceeds were used to refinance existing indebtedness with
VTB Bank as well as to refinance other obligations of the companies within our group (including redemption of ruble bonds). In May 2014, we signed amendments with VTB Bank to refinance the facility, providing for an extension of grace period until April 2015 and final maturity until April 2018.
In April 2013, our subsidiaries Beloretsk Metallurgical Plant and Urals Stampings Plant entered into revolving credit facilities with Gazprombank for a total amount of 3.3 billion rubles (approximately $106.9 million). The purpose of the facilities was working capital financing. Initially, the term of the facilities was three years with the term of each tranche of up to 24 months. The credit facility agreements were restructured in August and December 2015.
In April 2013, our subsidiaries Southern Kuzbass Coal Company and Yakutugol entered into separatenon-revolving credit facility agreements with Gazprombank for a total amount of $889.0 million: $400.0 million was made available to Southern Kuzbass Coal Company and $489.0 million was made available to Yakutugol, both for a period of up to five years with a three-year grace period obtained for the purpose of funding operational activities and refinancing of short-term debt provided by Gazprombank. As of December 31, 2015, the amount outstanding under the Southern Kuzbass Coal Company facility was $400.0 million and the amount outstanding under the Yakutugol facility was $385.8 million. The credit facility agreements were restructured and converted into rubles in January 2016. As a result, the debt of Southern Kuzbass Coal Company and Yakutugol amounted to a total of approximately 60.9 billion rubles.
In March and April 2013, our subsidiary Mecheltrans entered into twonon-revolving credit facilities with Moscow Credit Bank for a total amount of $88 million for a period of one year each with a bullet repayment. The facilities were provided for the purpose of working capital financing. In May 2013, the facilities amount was increased to $105 million. In April 2014, we extended the maturity of the facilities until December 2014 and replaced the borrower with Mechel Service. In December 2014, the maturity of the facilities was extended until February 2016. In November 2015, the maturity was further extended until February 2017.
Restrictive Covenants
Almost all of our loan agreements contain a number of covenants and restrictions. Such covenants and restrictions include, but are not limited to, financial ratios, various limitations, as well as acceleration and cross-default provisions. Unless a breach is remedied or a waiver is obtained, a breach of such covenants and restrictions generally permits lenders to demand accelerated repayment of principal and interest under their respective loan agreements. In addition, in the event of a payment default or the violation of certain other covenants and restrictions, creditors under other loan agreements can demand accelerated repayment of principal and interest under such other loan agreements pursuant to the cross-default provisions in such other agreements. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — Our creditors had accelerated and in the future may accelerate amounts due under our loan agreements due to our failure to comply with theour payment and other obligations, in our credit facilities caused some of our creditors to accelerate amounts due under their loan agreements and such failure, or like failure in the future, may cause the acceleration of our other outstanding debt, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — If we areWe may be unable to restructure all of our indebtedness or we may fail to comply with the new terms of the restructured indebtedness, our lenders may claim for accelerated repayment, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects”indebtedness” and “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — We have a substantial amount of outstanding indebtedness with restrictive financial covenants and most shares and assets in our subsidiaries are pledged.”
The table below sets out restrictive financial covenants contained inwe were required to comply with under our most significant loan agreements and the actual ratios/amountswith Russian state banks as of December 31, 2017.2019.
Restrictive Covenant | Requirement | Actual as of December 31, | ||||
Mechel’s Net Borrowings(1) to EBITDA ratio | Shall not exceed | |||||
Mechel’s Total Borrowings to EBITDA ratio | Shall not exceed | |||||
Mechel’s EBITDA(2) to Net Interest Expense ratio | Shall not be less than | |||||
Mechel’s EBITDA to Consolidated Financial Expense ratio | Shall not be less than | |||||
Mechel’s Cash flow from operating activities to EBITDA ratio | Shall not be less than 0.8:1 | |||||
Mechel’s EBITDA to Revenues ratio | Shall not be less than 0.2:1 | |||||
| (1) | Net Borrowings and Total Borrowings are calculated according to the respective definitions set by the credit agreements. Generally, Total Borrowings includes outstanding loans, |
| (2) | EBITDA is calculated according to the respective definitions set by the credit agreements and may differ from the disclosed Consolidated Adjusted EBITDA. |
As of December 31, 2017,2019, we were not in compliance with the majority ofmajor financial covenants contained in the group’s restructured loan agreements with Russian state banks, except for the Total Borrowings to EBITDA ratio and the Cash flow from operating activities to EBITDA ratio which werewas not breached. We have requested the relevant lenders to waive our financial covenants breaches. As of the date hereof, we did not obtain the required waivers with respect to the breaches of the major financial covenants.
Our restructured loan agreements with Russian state banks contain a number ofnon-financial covenants, including but not limited to restrictions on new debt, intra-group loans, new guarantees and/or security, maximum level of indebtedness in respect of various payment obligations, minimum level of net assets, maximum allowed level of legal claims, various information and certain other covenants. The covenants also include limitations on the amount of dividends on our common and preferred shares, and amounts that can be spent for capital expenditures, new investments and acquisitions.
As of December 31, 2017,2019, we were in breach of a number ofnon-financial covenants under our restructuredthe group’s loan agreements.agreements with Russian state banks. Such covenant breaches include, among others, the breach of minimum level of the borrowers’ net assets, share pledge without the prior consent of the lenders and guarantees provision. We have requested the relevant lenders to waive certain breaches of thenon-financial covenants under the group’s restructured loan agreements.covenants.
As of December 31, 2017,2019, we failed to pay scheduled principal and interest amounts and we were in breach of most financial andnon-financial covenants under the group’snon-restructured loan agreements with international lenders.ECA-lenders. In particular, financial covenants we were not in compliance with include the Net Borrowings to EBITDA ratio and the EBITDA to Net Interest Expense ratio, as well as the targeted amount of Adjusted Shareholder Equity. As ofWe have not remedied or obtained the date hereof, we did not remedy or obtain the requirednecessary waivers with respect to the failure to pay amounts due and the breaches of the financial andnon-financial covenants under the applicablerespective loan agreements.
The failure to pay the scheduled principal and interest amounts as described above, as well as the breach of financial and other covenants in our loan agreements, which were not remedied by us or waived by our creditors, permit the creditors under those loan agreements to accelerate the payment of principal and interest under those loan agreements, as well as trigger cross-default provisions under a number of other facilities, permitting the respective lenders under such other facilities to accelerate the payment of principal and interest under their loans. For a description of the current terms of our loan agreements, see “— Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.”
The failure to pay amounts due, thenon-compliance with financial andnon-financial covenants and the triggering of the cross-default provisions resulted in the reclassification of our group’s long-term debt into short-term liabilities in the amount of RUB 284,156220,046 million as of December 31, 2017.2019.
For a description of the existing payment defaults, breaches of covenants and restrictions, see “Item 13. Defaults, Dividend Arrearages and Delinquencies.”
Our ability to meet the debt covenants has been estimated on the basis of our short-term budgets and long-term projection (the “Projection”) of the company. The Projection combines production plans by entities, key products and cost items price dynamics, maintenance and project capital investment program, loans portfolio and repayment schedule and other budgeted and projected items. It includes income and cash flow statements on consolidated level which is being used for purposes of debt covenants calculation. The Projection is prepared using assumptions that comparable market participants would use.
To forecast key product prices, exchange rates dynamics and inflation rates we use a wide variety of sources including the following institutions: Ministry of Economic Development of the Russian Federation, leading investment banks, CRU, Metal Expert, MMI, World Bank, Oxford Economics, Consensus Economics, etc. along with our own estimates.
As of December 31, 2017,2019, we projected the following financial covenant ratios for the forthcomingsix-month and12-month periods, which we are required to comply with under our most significant loan agreements:
Restrictive Covenant | Requirement | Projection as of June 30, | Projection as of December 31, | |||||||
Mechel’s Net Borrowings to EBITDA ratio | Shall not exceed | |||||||||
Mechel’s Total Borrowings to EBITDA ratio | Shall not exceed | |||||||||
Mechel’s EBITDA to Net Interest Expense ratio | Shall not be less than | |||||||||
Mechel’s EBITDA to Consolidated Financial Expense ratio | Shall not be less than | |||||||||
Mechel’s Cash flow from operating activities to EBITDA ratio | Shall not be less than 0.8:1 | |||||||||
Mechel’s EBITDA to Revenues ratio | Shall not be less than 0.2:1 | |||||||||
The significant assumptions underlying our debt covenant determination are projected product prices, sales volumes, cost dynamics, inflation rates and discount rates. Some of these assumptions may deviate from our historical results primarily due to the market upturns in recent years. All these material assumptions are based on our projections and are subject to risk and uncertainty. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — Our creditors had accelerated and in the future may accelerate amounts due under our loan agreements due to our failure to comply with theour payment and other obligations in our credit facilities caused some of our creditors to accelerate amounts due under their loan agreements and such failure, or like failure in the future, may cause the acceleration of our other outstanding debt, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects.obligations.”
Description of Certain Indebtedness
See “Item 10. Additional Information — Material Contracts” for a summary description of material contracts related to our indebtedness. In addition, we have described below certain additional contracts related to our indebtedness. For more information, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Restrictive Covenants” andCovenants,” “Item 13. Defaults, Dividend Arrearages and Delinquencies.”Delinquencies” and note 10.1 to the consolidated financial statements.
Credit Facility Agreement for Yakutugol from Gazprombank
General
On February 6, 2009, our subsidiary Yakutugol entered into a credit facility agreement with Gazprombank for a total amount of $550.0 million for the purposes of funding financial and operating activities, including funding affiliates and credit repayments. The facility was initially repayable in quarterly installments starting from the first quarter of 2010 through the first quarter of 2012, however in February 2010 the final maturity was extended until February 2015.
As of December 31, 2014, the amount outstanding under the credit facility was $103.1 million. In August and December 2015, Yakutugol signed amendments to the credit facility agreement with Gazprombank to restructure debt totaling $103.1 million. In March 2016, the loan amount was converted into rubles resulting in the debt of 6.9 billion rubles. Restructuringrubles, and the restructuring of the credit facility became effective.
In June 2016, Yakutugol entered into an amendment to its credit facility agreement under which accrued and unpaid interest in the amount of 584.7 million rubles was capitalized. We repaid this amount and interest accrued on it during the period from April 15, 2017 to March 30, 2018.
Interest rate and interest period
Starting from the effective date, the interestInterest is payable monthly at the CBR key rate plus 1.5% per year.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid in accordance with the principal repayment schedule. Payable interest rate: 8.75% if our Total Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Total Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Total Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Total Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not exceed the CBR key rate plus 1.5% per year.
Repayment and prepayments
The final maturity date is April 20, 2022. Repayment is to be made in equal monthly installments starting from April 15, 2020. The borrower may prepay the loan in full or in part with a 30 day prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility are guaranteed by Mechel Mining, Mechel Carbon, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel and Southern Kuzbass Coal Company.
Security
The borrower’s obligations are secured by a pledge of 25%+1 share in each of Korshunov Mining Plant, Port Posiet, Izhstal, Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant and Urals Stampings Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share of Yakutugol, 25%+1 share of Mechel Mining and 25% of registered capital of Port Temryuk. In March 2016, we mortgaged the Ulak-Elga rail line under the credit facility agreement.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with certain financial and certainnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of Total Borrowings to EBITDA shall not exceed 5.5:1 in 2017, 4.5:1 in 2018, 3.5:1 in 2019 and 3.0:1 in 2020. Mechel group’s ratio of EBITDA to Consolidated Financial Expense shall not be less than 1.50:1 in 2017, 1.75:1 in 2018, 2.0:1 in 2019 and 2.5:1 in 2020. During the period from 2017 to 2020, we also have to comply with the ratios of Cash flow from operating activities to EBITDA and EBITDA to Revenues at the levels of 80% and 20%, respectively.
The credit facility contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control provisions and cross-defaults relating to other debt.
The credit facility agreement is governed by Russian law.
Credit Facility Agreements for Yakutugol and Southern Kuzbass Coal Company from VTB Bank
General
In September 2010, our subsidiaries Yakutugol and Southern Kuzbass Coal Company each entered into agreements further amending theone-year credit facility agreements executed with VTB Bank in November 2008 and further amended in November 2009, for the total amount of 13.6 billion rubles (approximately $422.4 million).rubles. In April 2012, we amended the credit facility agreements to extend their term until 2015 and change certain financial covenants.
In April 2014, VTB Bank converted the 13.6 billion ruble loan into U.S. dollars; as a result the debt of Yakutugol and Southern Kuzbass Coal Company amounted to $461.8 million. In July 2014, the debt was
converted back into rubles and Yakutugol and Southern Kuzbass Coal Company signed amendments to the credit facility agreements in the amount of 5.8 billion rubles and 10.0 billion rubles (approximately $103.4 million and $177.9 million as of December 31, 2014), respectively, providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018.
In September 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with VTB Bank to restructure debt in the total amount of 15.8 billion rubles (approximately $217.1 million as of December 31, 2015), providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The restructuring came into effect on October 13, 2015.
In December 2016, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with VTB Bank which provide for an extension of the repayment grace period until April 2020 and the final maturity until April 2022.
Interest rate and interest period
Interest under the credit facilities is payable monthly at the CBR key rate plus 1.5% per year. The lender may increase the interest rate by 1% per year if the borrowers fail to meet certain obligations under the credit facilities.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: 8.75% if our Net Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Net Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Net Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Net Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full.
If the CBR key rate plus 1.5% per year is less than payable interest rate, we apply the CBR key rate plus 1.5% per year for interest repayment.
Repayment and prepayments
The final maturity of the credit facilities for both Southern Kuzbass Coal Company and Yakutugol is April 6, 2022. Each of the facilities is to be repaid in equal monthly installments starting on April 6, 2020. Prepayment for all or part of the loan amounts is allowed subject to simultaneous compliance with certain requirements.
Guarantee
The borrowers’ obligations are guaranteed by Mechel Mining, Mechel Carbon, Mechel Carbon Singapore, Mechel Trading, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel and cross guarantee between Southern Kuzbass Coal Company and Yakutugol.
Security
The borrowers’ obligations are secured by a pledge of25%-350%-2 shares of Yakutugol, 25%50%+1 share2 shares of Southern Kuzbass Coal Company, 25%+1 share of Korshunov Mining Plant, 25%+1 share of Urals Stampings Plant and46.66%-1 share of Chelyabinsk Metallurgical Plant.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with financial and certainnon-financial covenants.
Under the credit facility agreements, Mechel group’s ratio of Net Borrowings to EBITDA shall not exceed 8.00:1 until December 31, 2017, 7.00:1 until December 31, 2018, 6.00:1 until December 31, 2019, 5.00:1 until December 31, 2020 and thereafter. Mechel group’s ratio of EBITDA to Net Interest Expense shall not be less than 1.50:1 until December 31, 2017, 1.75:1 until December 31, 2018, 2.00:1 until December 31, 2019, 2.25:1 until December 31, 2020 and thereafter. Financial covenants are tested semi-annually.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults relating to other debt, as well as limitations on payment of dividends, acquisitions and disposals andnon-core transactions.
The credit facility agreements are governed by Russian law.
Credit Facility Agreement for Chelyabinsk Metallurgical Plant from SberbankVTB Bank (previously Sberbank)
General
On October 13, 2010, Sberbank opened a credit line for Chelyabinsk Metallurgical Plant in the total amount of 15.0 billion rubles (approximately $493.9 million) to refinance short-term debt. On December 19, 2013, the borrower and Sberbank entered into an amendment agreement by extending the term of the facility by five years with a repayment grace period until March 30, 2015 and amending the security structure. As of December 31, 2015, the facility was fully drawn.
In February 2016, Chelyabinsk Metallurgical Plant signed an amendment to its credit facility agreement with Sberbank to restructure debt in the total amount of 15.0 billion rubles. The amendment became effective upon signing, and all overdue interest payments were capitalized, except for an agreed amount which was paid in June 2016.
In December 2016, part of the principal was restructured to be paid according to the agreed schedule (final repayment month is October 2017). In 2016-2017, we repaid 4.5 billion rubles reducing the loan principal amount to 10.5 billion rubles. In October 2017, Chelyabinsk Metallurgical Plant entered into an amendment to the credit facility agreement under which we are required to repay 123.6 million rubles in May 2018 and 4.4 billion rubles starting from January 10, 2020. In May 2018, we repaid the required amount. In January 2020, we repaid 370.6 million rubles. On February 7, 2020, we received consent from VTB Bank waiving the accelerated repayment of debt principal until March 31, 2020.
In November 2019, Sberbank assigned the credit facility, including related security, to VTB Bank. The terms and conditions of the facility agreement remained unchanged.
Interest rate and interest period
Interest under the credit facility is payable monthly at the CBR key rate plus 1.5% per year. The lender may change the interest rate to the CBR key rate plus 3.5% per year if our Total Borrowings/EBITDA ratio is 4.00 or less.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: (key rate +1.5%)×0.6 if our Total Borrowings/EBITDA ratio is above 6.01; (key rate +1.5%)×0.7 if our Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and (key rate +1.5%)×0.8 if our Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not be less than 8.75% per year.
Repayment and prepayments
The final maturity date is April 10, 2022. Repayment is to be made in equal monthly installments starting from January 10, 2020. The borrower may prepay the loan in full or in part with prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility agreement are guaranteed by Mechel, Mecheltrans, Mechel Service, Bratsk Ferroalloy Plant, Izhstal, Yakutugol, Korshunov Mining Plant, Southern Kuzbass Coal Company and Mechel Mining.
Security
Starting from March 2016, the credit facility shares one security package with other Sberbank (now VTB Bank) credit facilities: a pledge of 25%+1 share of Mechel Mining, a pledge of 25%+1 share of Beloretsk Metallurgical Plant, pledges of movable assets and mortgage over immovable assets of other Sberbank borrowers within Mechel group.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with certain financial and certainnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of Total Borrowings to EBITDA shall not exceed 5.5:1 as of December 31, 2017, 4.5:1 as of June 30, 2018 and December 31, 2018, 3.5:1 as of June 30, 2019 and December 31, 2019, 3.0:1 as of June 30, 2020 and thereafter. Mechel group’s ratio of EBITDA to Consolidated Financial Expense shall not fall below 1.5:1 as of December 31, 2017, 1.75:1 as of June 30, 2018 and December 31, 2018, 2.0:1 as of June 30, 2019 and December 31, 2019, 2.5:1 as of June 30, 2020 and thereafter.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreement is governed by Russian law.
Credit Facility for Mechel Trading from VTB Bank
General
In December 2013, Mechel Trading and Sberbank entered into an amendment to the existing $100.0 million credit facility (two tranches for $25.0 million and $75.0 million) by extending the term of the facility by five years with a repayment grace period until March 2015 and amending the security structure. The purpose of the credit facility was working capital, intra-group andpre-export financing. As of December 31, 2015, the facility was fully drawn.
In February 2016, Mechel Trading signed an amendment to its credit facility with Sberbank to restructure debt totaling $100.0 million. The amendment became effective upon signing, and all overdue interest payments were capitalized, except for an agreed amount which was paid in June 2016.
In April 2017, the credit facility was assigned by Sberbank to VTB Bank. The terms and conditions of the facility agreement remained unchanged, except for the security package which was not assigned.
In January 2020, we repaid $3.5 million under the credit facility. On February 7, 2020, we received consent from VTB Bank waiving the accelerated repayment of debt principal until March 31, 2020.
Interest rate and interest period
Interest under both tranches is payable monthly at 3M LIBOR plus a margin of 7% per year.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate and capitalization depend on
the ratio of our Total Borrowings to EBITDA: 3M LIBOR+5% and 2% is being capitalized if Total Borrowings/EBITDA ratio is above 6.01; 3M LIBOR+5.5% and 1.5% is being capitalized if Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and 3M LIBOR+6% and 1% is being capitalized if Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full.
Repayment and prepayments
The final maturity date is April 10, 2022. Repayment is to be made in equal monthly installments starting from January 10, 2020. The borrower may prepay the loan in full or in part with prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility are guaranteed by Mechel, Mecheltrans, Mechel Service, Bratsk Ferroalloy Plant, Izhstal, Yakutugol, Korshunov Mining Plant, Southern Kuzbass Coal Company, Chelyabinsk Metallurgical Plant and Mechel Mining.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with certain financial and certainnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of Total Borrowings to EBITDA shall not exceed 5.5:1 as of December 31, 2017, 4.5:1 as of June 30, 2018 and December 31, 2018, 3.5:1 as of June 30, 2019 and December 31, 2019, 3.0:1 as of June 30, 2020 and thereafter. Mechel group’s ratio of EBITDA to Consolidated Financial Expense shall not fall below 1.5:1 as of December 31, 2017, 1.75:1 as of June 30, 2018 and December 31, 2018, 2.0:1 as of June 30, 2019 and December 31, 2019, 2.5:1 as of June 30, 2020 and thereafter.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreement is governed by Russian law.
Credit Facility Agreement for Chelyabinsk Metallurgical Plant from SberbankVTB Bank (previously Sberbank)
General
On December 19, 2013, Sberbank opened a credit line for Chelyabinsk Metallurgical Plant in a total amount of 12.4 billion rubles for a period of five years with a repayment grace period until March 28, 2015. The purpose of the credit line was redemption of Mechel’s bonds and financing ofday-to-day operations. As of December 31, 2015, the facility was fully drawn.
In February 2016, Chelyabinsk Metallurgical Plant signed an amendment to its credit facility agreement with Sberbank to restructure debt in the total amount of 12.4 billion rubles. The amendment became effective upon signing, and all overdue interest payments were capitalized, except for an agreed amount which was paid in June 2016.
In December 2016, part of the principal was restructured to be paid according to the agreed schedule (final repayment month is July 2017). In 2017, we repaid 1.2 billion rubles reducing the loan principal amount to 11.2 billion rubles.
In November 2019, Sberbank assigned the credit facility, including related security, to VTB Bank. The terms and conditions of the facility agreement remained unchanged.
In January 2020, we repaid 399.5 million rubles under the credit facility. On February 7, 2020, we received consent from VTB Bank waiving the accelerated repayment of debt principal until March 31, 2020.
Interest rate and interest period
Interest under the credit facility is payable monthly at the CBR key rate plus 1.5% per year. The lender may change the interest rate to the CBR key rate plus 3.5% per year if our Total Borrowings/EBITDA ratio is 4.00 or less.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: (key rate +1.5%)×0.6 if our Total Borrowings/EBITDA ratio is above 6.01; (key rate +1.5%)×0.7 if our Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and (key rate +1.5%)×0.8 if our Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not be less than 8.75% per year.
Repayment and prepayments
The final maturity date is April 10, 2022. Repayment is to be made in equal monthly installments starting from January 10, 2020. The borrower may prepay the loan in full or in part with prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility agreement are guaranteed by Mechel, Mecheltrans, Mechel Service, Bratsk Ferroalloy Plant, Izhstal, Yakutugol, Korshunov Mining Plant, Southern Kuzbass Coal Company and Mechel Mining.
Security
Starting from March 2016, the credit facility shares one security package with other Sberbank (now VTB Bank) credit facilities: a pledge of 25%+1 share of Mechel Mining, a pledge of 25%+1 share of Beloretsk Metallurgical Plant, pledges of movable assets and mortgage over immovable assets of other Sberbank borrowers within Mechel group.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with certain financial and certainnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of Total Borrowings to EBITDA shall not exceed 5.5:1 as of December 31, 2017, 4.5:1 as of June 30, 2018 and December 31, 2018, 3.5:1 as of June 30, 2019 and December 31, 2019, 3.0:1 as of June 30, 2020 and thereafter. Mechel group’s ratio of EBITDA to Consolidated Financial Expense shall not fall below 1.5:1 as of December 31, 2017, 1.75:1 as of June 30, 2018 and December 31, 2018, 2.0:1 as of June 30, 2019 and December 31, 2019, 2.5:1 as of June 30, 2020 and thereafter.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreement is governed by Russian law.
Credit Facility Agreement for Chelyabinsk Metallurgical Plant from VTB Bank
General
In September 2015, Chelyabinsk Metallurgical Plant entered into an approximately 8.0 billion ruble (as calculated based on the market spot rate as of October 27, 2015) credit facility agreement with VTB Bank to refinance debts of Skyblock Limited totaling $107.7 million, which consistsconsisting of principal and interest in the amount of $101.9 million and $5.8 million, respectively, and of HBL Holding GmbH totaling €14.5 million, provided by VTB Bank. The facility had a grace period until April 2017 and the final maturity until April 2020.
In December 2016, Chelyabinsk Metallurgical Plant signed an amendment to its credit facility agreement with VTB Bank which provides for an extension of the repayment grace period until April 2020 and the final maturity until April 2022.
Interest rate and interest period
Interest under the credit facility is payable monthly at the CBR key rate plus 1.5% per year. The lender may increase the interest rate by 1% per year if the borrower fails to meet certain obligations under the credit facility.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: 8.75% if our Net Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Net Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Net Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Net Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full.
If the CBR key rate plus 1.5% per year is less than payable interest rate, we apply the CBR key rate plus 1.5% per year for interest repayment.
Repayment and prepayments
The credit facility is repayable in equal monthly installments starting on April 6, 2020. The final maturity date is April 6, 2022. The borrower may prepay the loan in full or in part subject to simultaneous compliance with certain requirements.
Guarantee
The borrower’s obligations are guaranteed by Southern Kuzbass Coal Company, Korshunov Mining Plant, Urals Stampings Plant, Mechel, Yakutugol, Mechel Mining, Mechel Trading, Mechel Carbon Singapore and Mechel Carbon.
Security
The borrower’s obligations are secured by a pledge of25%-350%-2 shares of Yakutugol, 25%50%+1 share2 shares of Southern Kuzbass Coal Company, 25%+1 share of Korshunov Mining Plant, 25%+1 share of Urals Stampings Plant and46.66%-1 share of Chelyabinsk Metallurgical Plant.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with financial and certainnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of Net Borrowings to EBITDA shall not exceed 8.00:1 until December 31, 2017, 7.00:1 until December 31, 2018, 6.00:1 until December 31, 2019, 5.00:1 until December 31, 2020 and thereafter. Mechel group’s ratio of EBITDA to Net Interest Expense shall not be less than 1.50:1 until December 31, 2017, 1.75:1 until December 31, 2018, 2.00:1 until December 31, 2019, 2.25:1 until December 31, 2020 and thereafter. Financial covenants are tested semi-annually.
The credit facility contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults relating to other debt, as well as limitations on payment of dividends, acquisitions and disposals andnon-core transactions.
The credit facility agreement is governed by Russian law.
Credit Facility for Elgaugol from Vnesheconombank
General
On September 20, 2017, our subsidiary Elgaugol and Vnesheconombank signed a credit facility agreement for a total amount of up to $190.0 million to refinance our debt obligations of approximately $183.1 million under the project financing for the development of the Elga coal deposit. As of the date of signing, the amount outstanding under the project financing was approximately $183.1 million. Repayment under the credit facility has started in October 2017. The final maturity date is April 30, 2022.
Interest rate and interest period
Interest is payable quarterly at a fixed rate of 5.45% per year. The lender may increase the interest rate by 1% or2.5-5% per year if the borrower fails to meet certain obligations, including payment obligations, under the credit facility.
Repayment and prepayments
Repayment is to be made in two tranches. SecondThe second tranche is repayable in 6 equal monthly installments starting from October 2017. FirstThe first tranche is repayable quarterly according to the following schedule: (i) in the amount of $2.5 million plus additional payment which depends on financial results of Elgaugol from January 2018 to October 2019; and (ii) in the amount of $10.0 million from January 2020 to April 2022. The remaining amount is to be paid in April 2022.
Security
The credit facility is secured by a pledge of 49% of registered capital of Elgaugol, 30% of shares of Korshunov Mining Plant, a pledge of Elgaugol proprietary land and land lease rights, a pledge of immovable property of Elgaugol including construction in progress and a pledge over all movable property of Elgaugol with a book value over one million rubles per unit.
Covenants and other matters
Under the credit facility, Debt Service Coverage Ratio shall not fall below 1.05. This financial covenant is tested annually.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default.
The credit facility agreement is governed by Russian law.
Russian bonds
On July 30, 2009, we placed series 04non-convertible interest-bearing bonds in an aggregate principal amount of 5.0 billion rubles. The bonds were registered with the FFMS and admitted to trading and listed on MICEX (currently Moscow Exchange). The bonds were secured by a guarantee from Yakutugol until July 2016.
The proceeds were used to fund the construction of the Elga coal complex. The bonds were due on July 21, 2016. The bonds bear a coupon to be paid quarterly. The annual interest rate for the first 12 coupons was set at 19%, for the13-16 coupons was set at 11.25%, for the17-22 coupons was set at 13%, for the23-24 coupons was set at 8% and for the25-28 coupons was set at 2%. We partially redeemed the bonds ahead of maturity on July 29, 2013 in the amount of 1.349 billion rubles, on January 27, 2014 in the amount of 1.276 billion rubles, on July 28, 2014 in the amount of 858 million rubles, on January 26, 2015 in the amount of 325 million rubles and on July 27, 2015 in the amount of 372.43 million rubles. In July 2016, we restructured the series 04 bonds. On June 20, 2016, we published public irrevocable offers through which the bondholders were proposed to amend current schedules of
redemption of the bonds and to waive the right to demand early redemption of the bonds. On July 7, 2016, the majority of the series 04 bondholders approved the new terms at the general meeting of bondholders. On July 28, 2016, the CBR registered amendments to the equity documents, including a schedule of partial redemption of the par value. The maturity of the bonds is extended until July 15, 2021. The annual interest rate is set as follows: for the 29 coupon at 13%, for the 30 coupon at 12.5%, for the 31 coupon at 12.75%, for the 32 coupon at 12.625%, for the 33 coupon at 11.75%, for the 34 coupon at 11.5%, for the 35 coupon at 11.125%, for the 36 coupon at (12%+(the CBR key rate +2.5%))/2,10.875%, for the 37 coupon at 10.375%, for the 38 coupon at 10.5%, for the37-4039-40 coupons at (11%+(the CBR key rate +2.5%))/2,10.625%, for the41-44 coupons 41 coupon at 10.00%, for the 42 coupon at 9.75%, for the 43 coupon at 9.375%, for the 44 coupon at (10%+(the CBR key rate +2.5%))/2 and for the45-48 coupons at (9%+(the CBR key rate +2.5%))/2. On each of August 11, 2016 and October 20, 2016, we partially redeemed 3.5% of the par value. On each of January 19, 2017 and April 20, 2017, we partially redeemed 4% of the par value. On each of July 20, 2017, October 19, 2017, and January 18, 2018, we partially redeemed 5% of the par value. We will gradually redeem the par value of the series 04 bonds: 5% of the par value on each of April 19, 2018, July 19, 2018, October 18, 2018, January 17, 2019, April 18, 2019, July 18, 2019, October 17, 2019 and January 16, 2020, we partially redeemed 5% of the par value. We intend to gradually redeem 5% of the par value of the series 04 bonds on each of April 16, 2020, July 16, 2020, October 15, 2020, January 14, 2021, April 15, 2021 and July 15, 2021.
On September 7, 2010, we placed series 13 and series 14non-convertible interest-bearing bonds in an aggregate principal amount of 10.0 billion rubles. The bonds were registered with the FFMS and admitted to trading and listed on MICEX (currently Moscow Exchange). The proceeds were used to fund the working capital of our group, refinance the existing loan agreements, as well as to finance the construction of the Elga coal complex and other investment projects of our group. The bonds bear a coupon to be paid on a semi-annual basis. The interest rate for the first 10 coupons was set at 10% per annum. In September 2015, we restructured the debt under series 13 and series 14 bonds. We were entitled to redeem the bonds on September 3, 2015, but failed to fulfill our obligations. On September 14, 2015, we published public irrevocable offers through which the bondholders were proposed to amend current schedules of redemption of the bonds and to waive the right to demand early redemption of the bonds. On September 17, 2015, the majority of the series 13 and 14 bondholders approved the new terms at the general meeting of bondholders. On October 21, 2015, the CBR registered amendments to the equity documents. The bonds are due on February 25, 2020. The annual interest rate is set as follows: for the11-13 coupons at 15%, for the14-15 coupons at 14%, for the16-17 coupons at 12.25% and for the18-19 coupons at (12%+(the CBR key rate +4%))/2.11.875%. In accordance with the new terms, we had to redeem the bonds amounting up to 500 thousand500,000 bonds of each series on September 28, 2015 and amounting up to 250 thousand250,000 bonds of each series on March 1, 2016 and August 30, 2016. On each of February 28, 2017, August 29, 2017 and February 27, 2018, we partially redeemed 10% of the par value. On each of August 28, 2018 and February 26, 2019, we partially redeemed 15% of the par value. On August 27, 2019, we partially redeemed 20% of the par value. We will gradually redeemredeemed the rest of 20% of the par value of both series of the bonds: 15% of the par valuebonds on August 28, 2018 and February 26, 2019 and 20% of the par value on August 27, 2019 and February 25, 2020. On September 28, 2015, we partially redeemed the bonds of both series in the total amount of 999.34 million rubles which equaled to 999,341 bonds. On March 1, 2016, we partially redeemed the bonds of both series in the total amount of 485.1 million rubles which equaled to 485,089 bonds. On August 30, 2016, we partially redeemed the bonds of both series in the total amount of 499.65 million rubles which equaled to 499,654 bonds.
On February 22, 2011, we placed series 15 and series 16non-convertible interest-bearing bonds in an aggregate principal amount of 10.0 billion rubles. The bonds were registered with the FFMS and admitted to trading and listed on MICEX (currently Moscow Exchange). The proceeds were used to fund the working capital of our group, refinance the existing loan agreements, as well as to finance the construction of the Elga coal complex and other investment projects of our group. The bonds are due on February 9, 2021. The bonds bear a
coupon to be paid on a semi-annual basis. The annual interest rate for the first 6 coupons was set at 8.25%, for the7-8 coupons was set at 13%, for the9-11 coupons was set at 8% and for the12-20 coupons was set at 8%. We partially redeemed the series 15 and series 16 bonds ahead of maturity on February 20, 2014 in the amount of 8.149 billion rubles, on August 21, 2014 in the amount of 75 million rubles and on February 19, 2015 in the amount of 37.2 million rubles. On August 18, 2016, we partially redeemed the series 15 bonds in the amount of 6.16 million rubles. The option to demand early redemption of the series 16 bonds was replaced with the novation agreement approved at the general meeting of bondholders on August 4, 2016.
On June 9, 2011, we placed series 17 and series 18non-convertible interest-bearing bonds in an aggregate principal amount of 10.0 billion rubles. The bonds were registered with the FFMS and admitted to trading and listed on MICEX (currently Moscow Exchange). The proceeds were used to refinance our short-term debt. The bonds are due on May 27, 2021. The bonds bear a coupon to be paid on a semi-annual basis. The interest rate for the first 10 coupons was set at 8.40% per annum. In June 2016, we restructured the debt under series 17 and series 18 bonds. On May 11, 2016, we published public irrevocable offers through which the bondholders were proposed to amend current schedules of redemption of the bonds and to waive the right to demand early redemption of the bonds. On May 25, 2016, the majority of the series 17 and 18 bondholders approved the new terms at the general meeting of bondholders. On June 28, 2016, the CBR registered amendments to the equity documents, including a schedule of partial redemption of the par value. The annual interest rate is set as follows: for the 11 coupon at 13.5%, for the 12 coupon at 13%, for the13-14 coupons at 12.125%, for the15-16 coupons at (11.5%+(the CBR key rate +2.5%))/2,10.625%, for the17-18 coupons at (10.5%+(the CBR key rate +2.5%))/210.375% and for the19-20 coupons at (9.5%+(the CBR key rate +2.5%))/2. We partially redeemed 3.5% of the par value on each of July 12, 2016 and September 1, 2016 and 4% of the par value on each of December 1, 2016 and March 2, 2017. On each of June 1, 2017, August 31, 2017, November 30, 2017, and March 1, 2018, we partially redeemed 5% of the par value. We will gradually redeem the par value of both series of the bonds: 5% of the par value on each of May 31, 2018, August 30, 2018, November 29, 2018, February 28, 2019, May 30, 2019, August 29, 2019, November 28, 2019 and February 27, 2020, we partially redeemed 5% of the par value. We intend to gradually redeem 5% of the par value of both series of the bonds on each of May 28, 2020, August 27, 2020, November 26, 2020, February 25, 2021 and May 27, 2021.
On June 14, 2011, we placed series 19non-convertible interest-bearing bonds in an aggregate principal amount of 5.0 billion rubles. The bonds were registered with the FFMS and admitted to trading and listed on MICEX (currently Moscow Exchange). The proceeds were used to refinance our short-term debt. The bonds are due on June 1, 2021. The bonds bear a coupon to be paid on a semi-annual basis. The interest rate for the first 10 coupons was set at 8.40% per annum. In July 2016, we restructured the bonds series 19. On May 11, 2016, we published public irrevocable offers through which the bondholders were proposed to amend current schedules of redemption of the bonds and to waive the right to demand early redemption of the bonds. On May 25, 2016, the majority of the series 19 bondholders approved the new terms at the general meeting of bondholders. On July 21, 2016, the CBR registered amendments to the equity documents, including a schedule of partial redemption of the par value. The annual interest rate is set as follows: for the 11 coupon at 13.5%, for the 12 coupon at 13%, for the13-14 coupons at 12.125%, for the15-16 coupons at (11.5%+(the CBR key rate +2.5%))/2,10.625%, for the17-18 coupons at (10.5%+(the CBR key rate +2.5%))/210.375% and for the19-20 coupons at (9.5%+(the CBR key rate +2.5%))/2. We partially redeemed 3.5% of the par value on each of August 4, 2016 and September 6, 2016 and 4% of the par value on each of December 6, 2016 and March 7, 2017. On each of June 6, 2017, September 5, 2017, December 5, 2017, and March 6, 2018, we partially redeemed 5% of the par value. We will gradually redeem the par value of the series 19 bonds: 5% of the par value on each of June 5, 2018, September 4, 2018, December 4, 2018, March 5, 2019, June 4, 2019, September 3, 2019, December 3, 2019 and March 3, 2020, we partially redeemed 5% of the par value. We intend to gradually redeem 5% of the par value of the series 19 bonds on each of June 2, 2020, September 1, 2020, December 1, 2020, March 2, 2021 and June 1, 2021.
In March 2017, Moscow Exchange registered our30-year exchange-traded bonds program. During the term of this program, we are able to place exchange-traded bonds for a total amount of up to 100.0 billion rubles. However, our ability to implement the program in the future is limited by restrictions under the existing loan agreements and market conditions.
Contractual Obligations and Commercial Commitments
The following table sets forth the amount of our contractual obligations and commercial commitments as of December 31, 2017.2019.
| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations and Commercial Commitments | Total | Less Than 1 Year | 2-3 Years | 4-5 Years | More Than 5 Years | |||||||||||||||
| (In millions of Russian rubles) | ||||||||||||||||||||
Short-Term Borrowings and Current Portion of Long-Term Debt | 380,540 | 380,540 | — | — | — | |||||||||||||||
Long-Term Debt Obligations, Net of Current Portion | 17,360 | — | 11,067 | 6,293 | — | |||||||||||||||
Interest Payable(1) | 20,420 | 20,420 | — | — | — | |||||||||||||||
Fines and penalties on credit facilities(2) | 21,753 | 21,753 | — | — | — | |||||||||||||||
Contractual Commitments to Operating Lease | 70,322 | 5,132 | 4,925 | 3,832 | 56,433 | |||||||||||||||
Purchase Obligations(3) | 3,431 | 2,774 | 657 | — | — | |||||||||||||||
Restructured Taxes Payable | — | — | — | — | — | |||||||||||||||
Rehabilitation provision(4) | 3,992 | 178 | 507 | 439 | 2,868 | |||||||||||||||
Pension obligations(5)(6) | 3,942 | 849 | 649 | 589 | 1,855 | |||||||||||||||
Short-Term Finance Lease Obligations | 7,476 | 7,476 | — | — | — | |||||||||||||||
Long-Term Finance Lease Obligations | 1,878 | — | 915 | 963 | — | |||||||||||||||
Fines and penalties on finance lease contracts(7) | 394 | 394 | — | — | — | |||||||||||||||
Contractual commitments to acquire plant, property and equipment(8) | 19,393 | 19,371 | 22 | — | — | |||||||||||||||
Contractual commitments to acquire raw materials and for delivery of goods and services | 73,141 | 70,959 | 557 | 903 | 722 | |||||||||||||||
Estimated finance costs(9) | 109,994 | 31,276 | 61,850 | 16,868 | — | |||||||||||||||
Estimated average interest rate(9) | 7.9 | % | 7.5 | % | 8.1 | % | 7.7 | % | — | |||||||||||
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Total Contractual Obligations and Commercial Commitments | 734,036 | 561,122 | 81,149 | 29,887 | 61,878 | |||||||||||||||
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| Payments Due by Period | ||||||||||||||||||||
Contractual Obligations and Commercial Commitments | Total | Less Than 1 Year | 2-3 Years | 4-5 Years | More Than 5 Years | |||||||||||||||
| (In millions of Russian rubles) | ||||||||||||||||||||
Short-Term Borrowings and Current Portion of Long-Term Debt | 370,206 | 370,206 | — | — | — | |||||||||||||||
Long-Term Debt Obligations, Net of Current Portion | 7,205 | — | 7,121 | 63 | 21 | |||||||||||||||
Interest Payable(1) | 9,014 | 9,014 | — | — | — | |||||||||||||||
Fines and Penalties on Credit Facilities(2) | 2,097 | 2,097 | — | — | — | |||||||||||||||
Contractual commitments to land leases related to exploration and use of mineral deposit | 51,501 | 1,641 | 3,276 | 3,268 | 43,316 | |||||||||||||||
Purchase Obligations(3) | 3,166 | 3,164 | 2 | — | — | |||||||||||||||
Rehabilitation Provision(4) | 5,402 | 164 | 598 | 547 | 4,093 | |||||||||||||||
Pension Obligations(5) | 5,548 | 615 | 1,014 | 963 | 2,956 | |||||||||||||||
Short-Term Lease Liabilities | 12,794 | 12,794 | — | — | — | |||||||||||||||
Long-Term Lease Liabilities | 17,510 | — | 4,352 | 1,078 | 12,080 | |||||||||||||||
Fines and Penalties on Lease Contracts(6) | 41 | 41 | — | — | — | |||||||||||||||
Contractual commitments to acquire plant, property and equipment(7) | 10,506 | 3,424 | 3,421 | 3,661 | — | |||||||||||||||
Contractual commitments to acquire raw materials and for delivery of goods and services(8) | 56,098 | 51,841 | 2,940 | 932 | 385 | |||||||||||||||
Estimated interest expense(9) | 98,921 | 24,213 | 39,820 | 34,888 | — | |||||||||||||||
Estimated average interest rate(9) | 8.1 | % | 7.8 | % | 8.4 | % | 7.8 | % | — | |||||||||||
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Total Contractual Obligations and Commercial Commitments | 650,009 | 479,214 | 62,544 | 45,400 | 62,851 | |||||||||||||||
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| (1) | Interest payable is included in the amount of RUB |
| (2) | In the year ended December 31, |
| (3) | Accounts payable for capital expenditures. |
| (4) | See note 22 to the consolidated financial statements. |
| (5) | Includes RUB 4,933 million pension obligations due in more than one year. |
| (6) | In the year ended December 31, 2019, we recognized RUB 49 million penalties on lease contracts. During the period, the amount of RUB 39 million was paid in cash and the amount of RUB |
| (7) |
Obligation to be paid within one year in accordance with the contractual terms. See note |
| (8) | Includes RUB 62 million commitments related to short-term leases. See note 10.6 to the consolidated financial statements. |
| (9) | Interest expense is estimated for a five-year period based on (1) estimated cash flows, (2) forecasted LIBOR, EURIBOR, the CBR key rate where applicable, (3) actual long-term contract interest rates and fixed |
As of December 31, 2017,2019, we guaranteed the fulfillment of obligations to third parties for a total amount of RUB nil.
The total carrying and discounted amount of commitmentsfuture lease payments under financethe lease contracts that have not yet commenced as of December 31, 20172019 is equal to RUB 75156 million. See note 2710.6 to the consolidated financial statements.
Inflation
Inflation in the Russian Federation was 3.0% in 2019, 4.3% in 2018 and 2.5% in 2017, 5.4% in 2016 and 12.9% in 2015.2017. Inflation has generally not had a material impact on our results of operations during the period under review in this section. However, there couldcan be no assurance that inflation will not materially adversely impact our results of operations in the future in case inflation accelerates. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — Inflation could increase our costs and decrease operating margins.”
Critical Accounting Policies and Estimates
Basis of preparation of the consolidated financial statements
See note 2 to our consolidated financial statements in “Item 18. Financial Statements.”
Summary of significant accounting policies and standards issued but not effective
See note 3 to our consolidated financial statements in “Item 18. Financial Statements.”
Trend Information
Demand
Mining. The demand for coking coal is dependent on the steel industry, which is directly tied to global economic cycles. In 2015, total global metallurgical coal imports fell by 3.2% as China continued its policy to decrease coal imports to support domestic producers. As a result of such policy, imports of metallurgical coal in China fell by 17 million tonnes in 2015, according to CRU. In 2016, despite growth of metallurgical coal imports in China, global metallurgical coal imports decreased by 0.7%, according to CRU, due to lower imports in Europe, South America and India. In 2017, total global metallurgical coal imports increased by 3.4%, this3.2% compared to the previous year, which was driven mainly by China as the government’s restructuring of the coal and steel sectors has supportedIndia, according to CRU. In 2018, increased demand for seaborne metallurgical coal import volumes at high levelsin India, Ukraine and Vietnam led to higher global metallurgical coal imports by 3.4% compared to 2017, according to CRU. In 2019, metallurgical coal imports growth in China and India was offset by lower imports in Europe, and total Chineseglobal metallurgical coal imports roseincreased by 9 million tonnes in 2017.0.2% compared to 2018, according to CRU.
The steam coal market is driven bynon-steel related factors, such as growth in electricity consumption, balance between supply and demand and seasonality. In 2015, total global seaborne steam coal imports dropped by 8.1% compared to 2014 driven by drastic fall in China import volumes, according to CRU. In 2016, total global seaborne steam coal imports changed insignificantly and decreased by 0.8%, according to CRU. In 2017, total global seaborne steam coal imports rose by 5.9%3.8% due to increased imports in China, and South Korea and India, according to CRU. In 2018, total global seaborne steam coal imports increased by 4.8% compared to 2017 due to consumption-driven growth in China and India, according to CRU. In 2019, total global seaborne steam coal imports growth rate slowed down to 2.1% and the main increase came from India and China, according to CRU estimates.
GlobalIn 2017, global iron ore trade increased by 1.2% in 2015, the lowest rate of growth since 2001, according to the Department of Industry, Innovation and Science of Australian Government. The main reason of such growth slowdown was decreased steel production in China. In 2016, global iron ore trade increased by 6.0% due to strong Chinese demand for imported iron ore which hit anall-time high in 2016, according to the Department of Industry, Innovation and Science of Australian Government and CRU. In 2017, global iron ore trade is estimated to have increased by 2.4% due to higher imports of iron ore in China in 2017, which was supported by robust steel production, according to the Department of Industry, Innovation and Science of Australian Government. In 2018, global iron ore trade declined marginally by 0.5%, according to the Department of Industry, Innovation and Science of Australian Government. In 2019, global iron ore trade is estimated to have declined by 2.2% due to global supply shortage which followed the fallout from the Vale tailings dam collapse, according to the Department of Industry, Innovation and Science of Australian Government.
Steel. Russia is our largest market for steel products. In 2015,2017, Russian rolled steel consumption increased by 6.9% and amounted to 41.943.8 million tonnes, according to Metal Expert. In 2016,2018, it declinedincreased by 3.8%1.3% and amounted to 40.344.4 million tonnes, according to Metal Expert. In 2017,2019, Russian rolled steel consumption increased by 9.4%5.9% and amounted to 44.147.0 million tonnes, according to Metal Expert.
In 2015, the volume of steel products exports from Russia grew by 8.7% and amounted to 27.4 million tonnes due to the growth in the exchange rate, according to Metal Expert. In 2016, exports of steel products increased by 4.5% and amounted to 28.6 million tonnes. The increase was due to the growth in manufacturing of steel products and decrease in domestic supplies. In 2017, exports of steel products decreased by 2.5%2.3% and amounted to 27.8 million tonnes as a result of a decline in manufacturing of steel products, according to Metal Expert.
In 2015, imports2018, the volume of steel decreasedproducts exports from Russia grew by 27.3%3.6% and amounted to 4.028.8 million tonnes, according to Metal Expert. The declineincrease related primarily to semi-finished products and was due to favorable conditions on the ruble devaluation and growthinternational market in suppliesthe first half of domestic producers.the year. In 2016, imports2019, exports of steel declinedproducts decreased by 5.7%10.8% and amounted to 3.825.7 million tonnes, according to Metal Expert. Such decline was attributable to slowing of the world economy growth combined with increased usage of trade barriers, particularly in the United States and Europe.
In 2017, imports of steel increased significantly by 50.5%49.6% compared to the previous year and amounted to 5.6 million tonnes mostly as a result of the growth in supplies of flat products from Kazakhstan, according to Metal Expert. In 2018, imports of steel slightly increased by 0.7% and amounted to 5.7 million tonnes, according to Metal Expert. In 2019, imports of steel decreased by 1.0% and amounted to 5.6 million tonnes, according to Metal Expert.
Power. In 2017,2019, the electricity output of our generating facilities increased by 1%4.5% as compared to 2016.2018. Heat energy generated for sale decreased by 3%6.1%. Power demand in Russia depends on its consumption by the industrial sector. In Russia, the steel and mining industries are major consumers of power and the level of production of steel and mining companies impact demand for power.
Sales
Mining. In 2018,2020, we expect sales volumes of our mining segment to increase as compared to 20172019 due to the increase ofin production volumes at the Elga coal deposit.Southern Kuzbass Coal Company and Yakutugol. We believe that our policy of concluding long-term contracts for coal sales will strengthen our relationships with our customers and will give us long-term presence in both the domestic and export markets.
Steel. Our steel segment sales volumes are expected to increase in 20182020 due to the increasedrestoration of pig iron and steel production atvolumes following overhaul of the universal rolling millblast furnace, resulting in the growth of structural shapes and rails sales as well as due toof the increase in productionfull range of rebar.metal products at Chelyabinsk Metallurgical Plant. In addition, we believe that our strategy aimed at increasing the efficiency of the existing distribution network in conjunction with direct sales from our plants to the largest customers will allow us to strengthen our leading position in the market, to provide us with greater stability in steel sales and to improve our cash flow in the current economic slowdown.flow.
Power. In 2018,2020, we expect sales volumes of our power segment to increase as compared to 2017.2019. We do not expect that consumption by small andmid-sized businesses and households, which are also customers of power and heat-supply companies, will change significantly. We plan to expand our sales channels to build a new customer base among small andmid-sized businesses, as well as public utilities. We also plan to optimize our production capacity through further integration of our intra-group assets. We hope that further integration of our power assets, as well as diversification of our customer portfolio will allow us to avoid a fall in power segment sales caused by a decrease in demand from large industrial companies that are shifting their business from power supply companies.
Inventory
Overall, our inventory increaseddecreased by RUB 2,7633,650 million, or 7.8%8.4%, to RUB 37,99039,773 million as of December 31, 20172019 from RUB 35,22743,423 million as of December 31, 2016,2018, due to the increase in finished goods production costs, which was due to the increase in raw materials costs.inventory stock optimization.
Costs
Mining. Within our mining segment, we expect our iron ore cash costs per tonne to increase in 20182020 as a result of increasing prices of power, explosives, automotive tires and tubes for open pit equipment and land use fees, while coal cash costs per tonne should remain relatively stable in 20182020 as a result of increasing operational efficiency and decreasing semi-fixed costs.
Steel. Excluding the effects of imposition of international sanctions against Russia and exchange rate fluctuations, our steel cash costs per tonne should remain relatively stable in 20182020 as a result of achieving cost savings, as well as efficiency and output gains arising as a result of our targeted capital investment program. Specifically, as we continue to introduce operational and technical changes at our plants allowing us to better integrate their products, we expect to be better able to control our costs.
Power. We expect that in 20182020 the cost of the production of electricity and heat energy will increase due to an increase in the prices of key raw materials, particularly natural gas, as well as some ancillary materials. We intend to maintain strict control over costs, which should enable us to cut expenditures by reducing fixed production costs, optimizing administrative expenses and increasing productivity to satisfy increased market demand in some regions.
Seasonality
Seasonal effects have a relatively limited impact on our results. Nevertheless, a slowing of demand and, thus, a reduction in sales volumes (and a related increase in inventories) is typically evident in the first and fourth quarters of the financial year as a result of the general reduction in economic activity associated with the New Year holiday period in Russia and elsewhere. We are dependent on the Russian construction market, which also experiences slowdowns in the winter months. By contrast, our power segment sales volumes are generally higher in the first and the fourth quarters of the year, due to increased electricity and steam consumption in the winter period.
Consumption of combustive, lubricative and energy supplies during the winter months is generally higher than during the rest of the year. In addition, railroad carriers demand that iron ore concentrate be fully dried and coal concentrate be partially dried for transportation during the winter months, resulting in higher costs during that time.
Item 6.Directors, Senior Management and Employees
Directors and Executive Officers
Board of Directors
All of our current directors were elected on June 30, 2017,28, 2019, and their terms expire on the date of our next annual general shareholders’ meeting, which will take place not later than June 30, 2018.2020. The business and mailing address for all our directors and executive officers is Krasnoarmeyskaya Street 1, Moscow 125167, Russian Federation.
Name | Year of Birth | Position | ||
Igor V. Zyuzin | 1960 | Chairman | ||
Alexander N. Shokhin(1) | 1951 | Deputy Chairman | ||
Oleg V. Korzhov(4) | 1970 | Director, Chief Executive Officer, Chairman of Management Board | ||
Victor A. Trigubko | 1956 | Director, Senior Vice President — Government Relations, Member of Management Board | ||
Tigran G. Khachaturov(4) | 1979 | Director | ||
Alexander N. Kotsky(1)(2)(4) | 1957 | Director | ||
Alexander D. Orishchin(1)(2)(3)(4) | 1932 | Director | ||
Yuriy N. Malyshev(1)(3)(4) | 1939 | Director | ||
Georgy G. Petrov(1)(2)(3) | 1948 | Director |
| (1) | Independent Director under the applicable NYSE regulations and Russian regulations. |
| (2) | Member of the Audit Committee of the Board of Directors. |
| (3) | Member of the Committee on Appointments and Remuneration. |
| (4) | Member of the Committee on Investments and Strategic Planning. |
Igor V. Zyuzinhas been Chairman of our Board of Directors since July 2010. He was our Chief Executive Officer from December 2006 to June 2010 and Chairman of our Management Board from September 2007 to June 2010. He served as Chairman of our Board of Directors from March 2003, when Mechel was founded, to December 2006 and has been a member of our Board of Directors since that time. Mr. Zyuzin has been a member of the Board of Directors of Mechel Mining since April 2008 and Chairman of the Board of Directors of Mechel Mining since July 2018. He held the position of Chief Executive Officer of Mechel Mining sincefrom July 2011.2011 to July 2018. Mr. Zyuzin served as Chairman of the Board of Directors of Southern Kuzbass Coal Company from May 1999 to June 2017 and Chairman of the Board of Directors of Yakutugol from June 2013 to June 2017. He was a member of the Board of Directors of Chelyabinsk Metallurgical Plant from June 2001 to April 2017 and a member of the Board of Directors of Yakutugol from October 2007 to June 2017. From July 2011 to April 2014, he was Chairman of the Management Board of Mechel Mining. From April 2008 to June 2011, Mr. Zyuzin served as Chairman of the Board of Directors of Mechel Mining. Mr. Zyuzin has over 30 years of experience in the coal mining industry. Mr. Zyuzin has a degree in technology and complex mechanization of underground mining from the Tula Polytechnic Institute. Mr. Zyuzin also has a degree in mining engineering economics and a Ph.D. in technical sciences in the coal mining field. Mr. Zyuzin may be deemed to be the beneficial owner of approximately 26.47%28.07% of our common shares. See “Item 7. Major Shareholders and Related Party Transactions.”
Alexander N. Shokhin has been Deputy Chairman of our Board of Directors since June 2016. He has been President of the Russian Union of Industrialists and Entrepreneurs since 2005. From 2005 to 2009, he was a member of the Public Chamber of the Russian Federation. From 2002 to 2005, he served as Chairman of the Supervisory Board of Renaissance Capital Investment Group. Since 1995, he has been President of the National Research University — Higher School of Economics (HSE), Head of the Department of the Theory and Practice of Business — Government Interaction. Mr. Shokhin has been a member of several deliberative bodies underthe Council of the Chamber of Commerce and Industry of the Russian PresidentFederation since 2016, a member of the Presidium of the Nonprofit Partnership National Corporate Governance Council since 2015 and Government.a member of Supervisory Board of Agency for Strategic Initiatives since 2011. From 2016 to 2019, he was a member of Supervisory Board of Agency of Technological Development. He has been a member of the Board of Directors of Eurasia Drilling Company Limited since 2007, a member of the Board of Directors of TMK PAO since 2008 and a member of the Board of Directors of RSMB Corporation JSC since 2015. From 1994 to 2002, he was a Deputy of the State Duma, as well as he held the posts of First Deputy Chairman of the State Duma, leader of the Duma faction “Our Home is Russia” and chairman of the State Duma’s Credit Institutions and Financial Markets Committee. In 1991-1994 and in 1998, he was Deputy Chairman of the Government of the Russian Federation. In 1991-1994, he also held the positions of Minister of Labor, Minister of Economics, Chairman of the Russian Agency for International Cooperation and Development. Mr. Shokhin graduated from the Lomonosov Moscow State University. He is a D.Sc. in economics, professor.
Oleg V. Korzhov has been a member of our Board of Directors since June 2014. Mr. Korzhov has been our Chief Executive Officer and Chairman of our Management Board since January 2014. He has been a member of our Management Board since March 2009. He was our Senior Vice President for Economics and Management from February 2012 to December 2013. He has been a member of our Management Board since March 2009. Mr. Korzhov was2013, our Senior Vice President for Business Planning and Analysis from November 2011 to February 2012 and our Vice President for Business Planning and Analysis from April 2009 to October 2011. Mr. Korzhov has been a member of the Board of Directors of Mechel Mining since June 2011 and2011. He served as Chairman of the Board of Directors of Mechel Mining sincefrom June 2014.2014 to July 2018. He was a member of the Board of Directors of Port Posiet from May 2008 to June 2014, Beloretsk Metallurgical Plant and Mecheltrans from 2010 to 2014, Southern Kuzbass Power Plant from 2009 to 2014, Kuzbass Power Sales Company from 2010 to 2014, Chelyabinsk Metallurgical Plant from 2009 to 2011 and from June 2014 to June 2015, as well as Vyartsilya Metal Products Plant from 2008 to 2010. From July 2008 to April 2009, he was Deputy Chief Executive Officer for Economics and Finance of Mechel-Steel Management. From September 2005 to January 2006, he served as Economic Planning Director of Mechel and from February 2006 to July 2008
he held the same position at Mechel-Steel Management. From 2003 to 2005, Mr. Korzhov was Director for Finance and Economics of EvrazHolding OOO. From 1998 to 2003, he was Deputy Director for Economic Analysis and Pricing and then Director for Economics of Nizhniy Tagil Iron and Steel Works OAO. Mr. Korzhov has a degree in economics and management in metallurgy from the Urals Polytechnic Institute and a degree in
general management from the Academy of National Economy under the Government of the Russian Federation. Mr. Korzhov also has a Ph.D. in economics.
Victor A. Trigubkohas been a member of our Board of Directors since June 2016. He has been our Senior Vice President — Government Relations since August 2006 and a member of our Management Board since February 2016. He was a member of our Board of Directors from June 2012 to March 2016. He served as our Vice President — Government Relations from 2005 to August 2006. From 2003 to 2005, he was our Vice President for Representation in Central and Eastern Europe, Chairman of the Board of Directors of Mechel Campia Turzii S.A. and a member of the Board of Directors of Mechel Targoviste S.A. From 2002 to 2003, Mr. Trigubko held the position of Director of Mechel International Holdings AG’s representative office in Romania. From 1997 to 2002, he was Head of Izhstal’s representative office in Moscow. From 1992 to 1997, he held various executive positions in the metallurgical company Unibros Steel Co. LTD, including Deputy General Director. Mr. Trigubko also worked in the Foreign Relations Department of the USSR State Committee for Labor and Social Issues and in the USSR Trade Representation Office in Romania. Mr. Trigubko has a degree in economics from the Kalinin State University.
Tigran G. Khachaturov has been a member of our Board of Directors since March 2016. Since September 2017, heHe has been Deputy Chairman of the Management Board of Gazprombank JSC since August 2019 and a member of the Management Board of Gazprombank JSC. SinceJSC since September 2017. From September 2016 to August 2019, he has served as Head for restructured assets management at Gazprombank JSC. He was a member of the Board of Directors of REP Holding JSC from June 2019 to January 2020. From February 2015 to October 2016, he was an Adviser to our Chief Executive Officer for Finance. From July to December 2014, he was an Adviser to Director of Atomenergoprom JSC. From June 2013 to July 2014, he served as First Executive Vice President, as well as Head of Moscow representative office of Uranium One Holding N.V. From August 2007 to May 2013, Mr. Khachaturov was First Deputy General Director and Acting General Director at Atomredmetzoloto OAO. From April 2002 to August 2007, he held various positions at Techsnabexport OJSC, including First Deputy General Director since July 2004. Mr. Khachaturov has a degree in finance and credit from the Plekhanov Russian Academy of Economics.
Alexander N. Kotsky has been a member of our Board of Directors since March 2016. From June 2015 to June 2016, he was a member of the Board of Directors of Port Vanino. From 2008 to 2015, he was a member of the Board of Directors of Southern Kuzbass Coal Company. Mr. Kotsky has a degree in railway engineering from the Novosibirsk Institute of Railway Engineers.
Alexander D. Orishchin has been a member of our Board of Directors since March 2016. He was a member of the Board of Directors of Mechel Mining from June 2010 to June 2014. Mr. Orishchin has a degree in mining from the Tomsk Polytechnic Institute. He also holds a Ph.D. in technical sciences from the Moscow Mining Institute.
Yuriy N. Malyshev has been a member of our Board of Directors since June 2013. Mr. Malyshev is currently President of the State Geological Museum of V.I. Vernadsky. He has been President of the Academy of Mining Sciences of Russia since 1993. He has been a member of the Board of Directors of Acron PJSC since May 2015 and2015. He was a member of the Board of Directors of Rosgeologia JSC sincefrom June 2017.2017 to September 2019. From 2010 to 2016, he served as Chairman of the Board of Directors of OShK Soyuzspetsstroy ZAO. From 1999 to 2013, he was President of the Nonprofit Partnership Russian Mining Operators.Operators, and now he is the Honorary President and a member of the Supreme Mining Council. Mr. Malyshev has over 50 years of experience in various executive positions in the coal mining industry. He is a member of the Russian Academy of Sciences and has a D.Sc. in technical sciences. He has the honorary title of Honored Worker of Science and Technology of the Russian
Federation. He is the recipient of several prizes and awards, including the order “For Merit to the Motherland” of the third grade, the Order of Honour and all three grades of the “Miner’s Glory” order. Mr. Malyshev has a degree in mining from the Kemerovo Mining Institute.
Georgy G. Petrov has been a member of our Board of Directors since June 2017. Since May 2016, he has served asHe currently holds the position of an Adviser on international issues to the President of the Chamber of Commerce and Industry of the Russian Federation. From April 2002 to May 2016, he was Vice President of the Chamber of Commerce and
Industry of the Russian Federation. From 1998 to 2002, Mr. Petrov served as Director of the Department of Economic Cooperation in the Ministry of Foreign Affairs of the Russian Federation,Ambassador-at-large. From 1971 to 1998, he held various positions in the Ministry of Foreign Trade of the USSR and Ministry of Foreign Economic Relations and Trade of the Russian Federation. Mr. Petrov has a degree in international currency and credit relations from the Moscow State Institute of International Relations.
Executive Officers
Name | Year of Birth | Position | ||
Oleg V. Korzhov | 1970 | Chief Executive Officer, Director, Chairman of Management Board | ||
Victor A. Trigubko | 1956 | Senior Vice President — Government Relations, Director, Member of Management Board | ||
Valery A. Sheverdin | 1963 | Vice President for Corporate Security, Member of Management Board | ||
Nelli R. Galeeva | 1973 | Chief Financial Officer, Member of Management Board | ||
Pavel V. Shtark | 1969 | Deputy Chief Executive Officer for Prospective Development | ||
Minas A. Darbinyan | 1983 | Deputy Chief Executive Officer for Financial Control, Member of Management Board | ||
Irina N. Ipeeva | 1963 | Director of Legal Department, Member of Management Board | ||
Natalya O. Trubkina | 1964 | Human Resources Director, Member of Management Board | ||
| Chief Executive Officer of Mechel Mining Management | |||
Andrey A. Ponomarev | 1977 | Chief Executive Officer of Mechel-Steel Management | ||
| Chief Executive Officer of Mechel Energo | |||
Alexey V. Lebedev | 1974 | Chief Executive Officer of Mecheltrans Management |
For brief biographies of Messrs. Korzhov and Trigubko, see “— Board of Directors.”
Valery A. Sheverdin has been our Vice President for Corporate Security since March 2014 and a member of our Management Board since August 2014. From June 2009 to March 2014, Mr. Sheverdin held the positions of our Director of the Department of Safety of Property Complex and Director of the Corporate Security Department. From April 2011 to March 2014, he was Chief Executive Officer of Mechel Garant OOO. From July 2007 to April 2011, he worked in PSC Mechel-Centre OOO, including as General Director from December 2007. From April 2003 to June 2007, Mr. Sheverdin held various positions inLukom-A Agency ZAO. From February 2001 to March 2003, he was Chairman of the Belgorod regional office of the Russian Fund of Social Progress. From September 1995 to February 2001, he held various executive positions in security agencies. From November 1981 to August 1995, he served in the Armed Forces of the Russian Federation. Mr. Sheverdin graduated from the Moscow Border Institute of the Federal Security Service of the Russian Federation with a degree in law and the Kolomna Higher Artillery Command College of the October Revolution.
Nelli R. Galeevahas been our Chief Financial Officer since January 2018 and a member of our Management Board since July 2016. She has been a member of the Board of Directors of Mechel Mining since March 2018. From March 2014 to January 2018, she was Director of our Accounting and Tax Department. She served as Chief Accountant of Mechel Mining Management from April 2009 to March 2014 and Chief Accountant of Mechel Mining from May 2008 to April 2009. From August 2005 to May 2008, she was Chief Accountant of Southern Kuzbass Coal Company. From March 2000 to August 2005, Mrs. Galeeva worked at Southern Kuzbass Coal Company, first as chief of consolidated and international reporting department and then as deputy chief accountant, chief of consolidated reporting department. From June 1995 to February 2000, she was an accountant of finance department and then a deputy chief production accountant at Krasnogorsky
Open Pit OAO. Mrs. Galeeva has a degree in accounting and audit from the Kuzbass State Technical University and a degree in finance and credit from the Kemerovo State University.
Pavel V. Shtarkhas been our Deputy Chief Executive Officer for Prospective Development since July 2019. He was a member of our Management Board from August 2014 to May 2017. From July 2013 to July 2019, he served as Chief Executive Officer of Mechel Mining Management. He has been a member of the Board of Directors of Moscow Coke and Gas Plant since June 2013, a member of the Board of Directors of Elgaugol since August 2013, a member of the Board of Directors of Mechel Mining, Korshunov Mining Plant and Yakutugol since June 2014 and a member of the Board of Directors of Southern Kuzbass Coal Company since June 2017. He was a member of the Board of Directors of Southern Kuzbass Coal Company from June 2014 to March 2016. He was a member of the Management Board of Mechel Mining from July 2013 to April 2014. From October 2012 to July 2013, he held the position of Deputy General Director for Coke and Chemical Products Production — Managing Director of Moscow Coke and Gas Plant. From April 2008 to October 2012, Mr. Shtark served as Deputy Director, Director and Managing Director of Mechel Coke. From October 1996 to March 2008, he was Head of the Workshop, Chief Engineer of Coke and Chemical Products Production at Nizhniy Tagil Iron and Steel Works OAO. Mr. Shtark has a degree in equipment and technology of welding production and a degree in chemical technology of natural energy carriers and carbon materials, both from the Urals State Technical University.
Minas A. Darbinyan has been our Deputy Chief Executive Officer for Financial Control since June 2015 and a member of our Management Board since July 2015. Since May 2017, he serves as an adviser to General Director of GPB Asset Development OOO. He has been a member of the Board of Directors of Chelyabinsk Metallurgical Plant since April 2017.2017 and a member of the Board of Directors of Port Vanino since June 2018. He was a member of the Board of Directors of Port Posiet from March 2016 to June 2017. From November 2013 to January 2015, he served as Director for Strategic Planning at Uranium One Holding N.V., part of state-owned corporation Rosatom. From April to November 2013, he headed Investment Planning and Development Department at Atomredmetzoloto OAO, also part of Rosatom. From May 2011 to April 2013, Mr. Darbinyan was senior consultant at KPMG ZAO. From 2008 to 2011, he held various positions atMIEL-DPM OOO, including Chief Financial Officer since 2010. From 2006 to 2008, he was an assistant to the Vice President-head of Moscow regional office in Moscow Industrial bank. Mr. Darbinyan has a degree in management from the Academy of National Economy under the Government of the Russian Federation and a degree in economics from the State Academic University for Humanities.
Irina N. Ipeevahas been Director of our Legal Department since April 2009 and a member of our Management Board since September 2007. She has been a member of the Board of Directors of Mechel Mining since June 2014.2014 and a member of the Board of Directors of Elgaugol since February 2018. She was a member of the Board of Directors of Southern Kuzbass Coal Company from May 2005 to June 2017. From September 2007 to April 2009, she was our General Counsel, Deputy Director of the Legal Department — Director of the Department of Corporate Governance and Property. From 2003 to 2007, Mrs. Ipeeva held the position of General Counsel and Director of the Department of Corporate Governance and Property. From February to July 2006, she was Director of the Department of Corporate Governance and Property of Mechel-Steel Management. From March to June 2003, Mrs. Ipeeva held the position of Deputy General Director for Property Matters of Uglemet-Trading OOO. From December 2001 to March 2003, she was Head of the Department for Regulation of
Corporate Relations and Property of Southern Kuzbass Coal Company and, from January to November 2001, she was Head of the Share Capital Department. From August 1988 to January 2001, Mrs. Ipeeva worked at the Kuzbassugleobogashcheniye Industrial Amalgamation and the Tomusinskaya Washing Plant, where she held positions ranging from a legal adviser to head of the legal department. Mrs. Ipeeva has a degree in law from the Kuibyshev State University.
Natalya O. Trubkinahas been our Human Resources Director since September 2015 and a member of our Management Board since February 2016. From August 2009 to August 2015, she held the position of Human Resources Director of Mechel-Steel Management. She was a member of the Board of Directors of Chelyabinsk Metallurgical Plant from June 2015 to April 2017 and a member of the Board of Directors of Urals Stampings Plant from June 2014 to June 2015. In 2009, she served as Human Resources Director in Souzmetallresource Management Company ZAO. From 2004 to 2009, Mrs. Trubkina worked in United Company RUSAL, including as Head of the Human Resources Department of secondary alloys business since 2006. From 2003 to 2004, she was HR manager in Texas Nafta Industries Inc. From 1994 to 2002, she was HR manager in Belpromstroybank OAO. Mrs. Trubkina has a degree in heat and gas supply and ventilation from the Novopolotsk Polytechnic Institute, as well as a diploma of further education in personnel management psychology from the Lomonosov Moscow State University.
PavelIgor V. ShtarkKhafizovhas been Chief Executive Officer of Mechel Mining Management since July 2013. He2019. From January to July 2019, he was a memberDeputy Chief Executive Officer of our Management Board from August 2014 to May 2017.Mechel Mining Management. He has been a member of the Board of Directors of Moscow CokeYakutugol since February 2008 and Gas Plant since June 2013, a member of the Board of Directors of Elgaugol since August 2013, a member of the Board of Directors of Mechel Mining, Korshunov Mining Plant and Yakutugol since June 2014 and a member of the Board of Directors of Southern Kuzbass Coal Company since June 2017. He was a member of the Board of Directors of Southern Kuzbass Coal Company from June 20142013. From July 2017 to March 2016. He was a member of the Management Board of Mechel Mining from July 2013 to April 2014. From October 2012 to July 2013,December 2018, he held the position of Deputy GeneralChief Executive Officer of Mechel Mining Management — Director for Coke and Chemical Products Production —of the Sakha Republic (Yakutia)’s Mining Assets Department. From January 2006 to July 2017, Mr. Khafizov served as Managing Director of Moscow Coke and Gas Plant. From April 2008 to October 2012, Mr. Shtark served as
Deputy Director, DirectorYakutugol, Chief Executive Officer of Mechel Mining Management, Mechel Mining, Chief Executive Officer and Managing Director of Mechel Coke.Southern Kuzbass Coal Company. From October 1996November 1992 to March 2008,January 2006, he was Head of the Workshop,held various positions at Korshunov Mining Plant, including Chief Engineer of Coke and Chemical Products Production at Nizhniy Tagil Iron and Steel Works OAO.Executive Officer since November 2003. Mr. ShtarkKhafizov has a degree in equipmenttechnology and technologycomplex mechanization of welding productionopen pit mining from the Urals State Technical University and a degree in chemical technology of natural energy carriers and carbon materials from the same university.Mining Institute.
Andrey A. Ponomarev has been Chief Executive Officer of Mechel-Steel Management since December 2015. He was a member of our Management Board from February 2016 to May 2017. From August 2012 to November 2015, he served as First Deputy Chief Executive Officer of Mechel-Steel Management. He has been a member of the Board of Directors of Chelyabinsk Metallurgical Plant since 2013. He was a member of the Board of Directors of Vyartsilya Metal Products Plant and Beloretsk Metallurgical Plant from 2013 to 2014, Urals Stampings Plant from 2013 to 2015 and Izhstal from 2014 to 2015. From August 2009 to May 2013, he headed Mechel Service Global. From May 2005 to August 2009, Mr. Ponomarev was Managing Director of Mechel Service. From 2002 to 2005, he held various positions at Uglemet Trading OOO and Mechel Trading House OOO, including Head of Regional Sales Department. From 2000 to 2002, he served as chief of the analysis bureau in Chelyabinsk Metallurgical Plant’s marketing and sales service. From 1999 to 2000, he was an engineer in the special steels sales department of Chelyabinsk Metallurgical Plant’s marketing and sales service. Mr. Ponomarev has a degree in pressure metal treatment and a degree in finance from the Southern Urals State University.
Petr A. PashninDenis N. Graf has been Chief Executive Officer of Mechel Energo since November 2013.April 2019. He has been a member of the Board of Directors of Southern Kuzbass Power Plant since June 2015. He was a member of the Board of Directors of Tomusinsk Energo Management from June 2014 to June 2015 and a member of the Board of Directors of Kuzbass Power Sales Company from June 2014 to June 2017.2019. From July 2000 to November 2013, he held the position of Technical Director of Mechel Energo. From March 2012 to June 2013, he was Chief Operating Officer of Toplofikatsia Rousse. From September 2011 to May 2012, he served as Head of Energy Efficiency and Energy Audit Department of Mechel Energo. From February 2008 to September 2011, he held various positions at the Chelyabinsk branch of Mechel Energo. From July 1999 to January 2008, heApril 2019, Mr. Graf worked at Chelyabinsk Metallurgical Plant, where he held positions ranging from steam turbine operatoran engineer to heat and power station chief engineer.the head of the central electrotechnical laboratory. Mr. PashninGraf has a degree in electric drive and automatics of industrial heat power engineeringinstallations from the Southern Urals State University.University and a degree in finance and credit from the Southern Urals Management and Economics Institute.
Alexey V. Lebedev has been Chief Executive Officer of Mecheltrans Management since December 2013. He was a member of our Management Board from August 2014 to May 2017. He has been a member of the Board of
Directors of Port Kambarka and Port Vanino since June 2014. He was a member of the Board of Directors of Port Posiet from June 2014 to March 2016 and a member of the Board of Directors of Mecheltrans from April 2014 to August 2016. He served as Chief Executive Officer of Mecheltrans Auto from December 2010 to December 2013 and Director of Motor Transportation Department of Mecheltrans from June 2010 to January 2011. From 2005 to 2010, Mr. Lebedev was Director of Uraltechstroy NN OOO. From 2004 to 2005, he held the position of Deputy General Director of Region Express TK OOO. From 1998 to 2003, he held various positions at UralPromSnab OOO. From 1993 to 1998, he was Head of Railway Transportation Department of Transfero EAFC OOO. Mr. Lebedev has a degree in industrial management from the Izhevsk State Technical University.
Compensation
Our directors and executive officers were paid an aggregate of approximately 613.4RUB 618.0 million rubles for services in all capacities provided to us during 2017.2019. Our directors and executive officers are also provided with voluntary medical insurance and the use of wireless services.
Board of Directors
Members of our Board of Directors are elected by a majority of the voting stock present at our annual general shareholders’ meeting using a cumulative voting system. Directors are elected to serve until the next
annual general shareholders’ meeting and may bere-elected an unlimited number of times. Our Board of Directors currently consists of nine members, five of whom are independent pursuant to the director independence criteria set forth both in the applicable Russian regulations and NYSE regulations, as well as in the Charter and the Bylaw on the Board of Directors of Mechel PAO. The Board of Directors is responsible for our overall management, except matters reserved for our shareholders. See “Item 10. Additional Information — General Meetings of Shareholders” for more information regarding the competence of our general shareholders’ meetings. Members of the Board of Directors do not have service contracts with us or with any of our subsidiaries that provide them benefits upon termination of their service.
Committees of the Board of Directors
Audit Committee
The Audit Committee consists of Georgy Petrov, Alexander Orishchin and Alexander Kotsky, each of whom is an Independent Director. Our Audit Committee operates pursuant to a bylaw, which is available atwww.mechel.com. The purpose of this Committee is to assist the Board of Directors with its oversight responsibilities regarding:
the quality and integrity of our financial statements;
our compliance with legal and regulatory requirements;
the independent auditor’s qualifications and independence; and
the performance of our internal audit function and independent auditor.
Committee on Investments and Strategic Planning
The members of the Committee on Investments and Strategic Planning are Yuriy Malyshev, Alexander Orishchin, Alexander Kotsky, Tigran Khachaturov and Oleg Korzhov. The Committee on Investments and Strategic Planning defines our strategic goals and defines our priorities. The Committee makes recommendations to the Board of Directors on our dividend policy and on the adjustments to our strategy as required in order to enhance our efficiency. Our Committee on Investments and Strategic Planning operates pursuant to a bylaw, which is available atwww.mechel.com.
The followingsub-committees function under the Committee on Investments and Strategic Planning:
Sub-committee on metallurgical production strategy, with members Alexander Orishchin and Oleg Korzhov; and
Sub-committee on mining production strategy, with members Yuriy Malyshev and Alexander Kotsky.
Committee on Appointments and Remuneration
The members of the Committee on Appointments and Remuneration are Alexander Orishchin, Georgy Petrov and Yuriy Malyshev, each of whom is an Independent Director. The Committee on Appointments and Remuneration has been established to maintain continuity and high professional standards, as well as to work out a competitive remuneration system, within our group. The Committee prepares recommendations to the Board of Directors on candidates for appointment to the Management Board or as our Chief Executive Officer or other executive officers or senior officers of our subsidiaries. It also prepares appraisals of their performance and makes recommendations regarding their remuneration. The Committee also defines the requirements applicable to nominees to the Board of Directors and informs the shareholders of such nominees. The Committee operates pursuant to a bylaw, which is available atwww.mechel.com.
Management Board
In September 2007, we created a Management Board to provide for greater oversight of our operations. For more information, see “Item 10. Additional Information — Management Board.” Currently, our Management Board consists of seven members. For more information, see “Item 10. Additional
Information — Management Board.” The members of the Management Board are set out above under “— Directors and Executive Officers.”
Management Companies
We have four management companies within our group which provide management services to the companies within the mining, steel and power segments and to our companies within our transport division.
Mechel Mining Management
Mechel Mining Management was established in July 2008 as a wholly-owned subsidiary of Mechel Mining with the purpose to provide management services to the production subsidiaries within our mining segment. Mechel Mining Management presently performs the functions of the sole executive body of the following companies: Southern Kuzbass Coal Company, Korshunov Mining Plant, Yakutugol, Moscow Coke and Gas Plant, Mechel Coke, Mechel Engineering, Elgaugol, Elga-road and Vzryvprom.
Mechel-Steel Management
Mechel-Steel Management was established in October 2005 as a wholly-owned subsidiary of Mechel with the initial purpose to provide management services to our subsidiaries by performing the functions of their respective management bodies. The company’s former name was Mechel Management OOO which was changed in September 2009 in line with the reorganization of our group’s management structure. Mechel-Steel Management presently provides management services to our subsidiaries within the steel segment by performing the functions of the sole executive body of Chelyabinsk Metallurgical Plant, Urals Stampings Plant, Izhstal and Bratsk Ferroalloy Plant.
Mechel Energo
Mechel Energo was established in May 2001 under the name of Regional Energy Company ENERGOSBYT OOO. In February 2004, we acquired the company with a view to make the strategic and operational
management of our power assets more efficient. The name of the company was changed to its current name in April 2004. Mechel Energo performs the functions of the sole executive body of Southern Kuzbass Power Plant in our power segment.
Mecheltrans Management
Mecheltrans Management was established in March 2010 as a wholly-owned subsidiary of Mechel. Mecheltrans Management presently provides management services to the companies within our transport division by performing the functions of the sole executive body of Mecheltrans, MecheltransVostok, Port Posiet, Port Kambarka and Port Temryuk.
Review Commission
The Review Commission verifies the accuracy of our financial reporting under Russian law and generally supervises our financial activity. The members of our Review Commission are nominated and elected by our shareholders to serve until the next annual general shareholders’ meeting. Our Chief Executive Officer, a member of our Board of Directors and a member of our Management Board may not simultaneously be a member of the Review Commission. Our Review Commission currently has three members: Alexander N. Kapralov, Irina V. Bolkhovskikh and Natalya S. Zykova. The powers and duties of our Review Commission are governed by a bylaw approved by our general shareholders’ meeting.
Internal Audit Department
The Internal Audit Department’s main function is to systematically, consistently and independently from our management assess and improve the efficiency of our group’s risk management, internal control, corporate governance and information systems. The activities of the Internal Audit Department are governed by the Bylaw on the Internal Audit Department. Natalya S. Zykova serves as the Director of the Internal Audit Department. The Department is functionally subordinated to the Board of Directors, and administrated by our Chief Executive Officer.
Corporate Governance Principles
Our corporate governance principles are based on the Russian Corporate Governance Code recommended by the CBR and supplemented by the obligations of the Board of Directors prescribed by Russian law, our charter and internal rules of procedure. The principles are intended to ensure that we are managed and monitored in a responsible and value-driven manner. They include the protection of shareholders’ rights, comprehensive disclosure and transparency requirements and rules governing conflicts of interest. We are committed to continuing to adapt our corporate governance principles to developments in best-practices. Our corporate governance principles are reflected in our corporate documents, such as:
the Charter;
the Bylaw on the Board of Directors;
the Bylaw on the General Meeting of Shareholders;
the Bylaw on the General Director;
the Bylaw on the Collegial Executive Body (Management Board);
the Code of Business Conduct and Ethics;
the Bylaw on the Prohibition and Prevention of Insider Trading;
the Bylaw on the Disclosure of Information that may Significantly Impact the Market Value of our Shares;
the Bylaw on Information Policy;
the Bylaw on Appointments and Remuneration Committee of the Board of Directors;
the Bylaw on Investments and Strategic Planning Committee of the Board of Directors;
the Bylaw on the Audit Committee of the Board of Directors;
the Code of Corporate Governance; and
the Bylaw on Dividend Policy.
These documents or summary thereof are available atwww.mechel.comandwww.mechel.ru.
We also comply with the corporate governance requirements applicable to Russian public companies listed on Russian stock exchanges. Such requirements include: (1) the obligation to have at least three independent directors, who shall represent at leastone-fifth of the members of the board of directors; (2) the establishment of an audit committee chaired by an independent director and a committee on appointments and remuneration consisting of independent directors, or, if not practicable, of independent directors and members of the board of directors who are not a sole executive body and/or members of the collegial executive body; (3) the
establishment of a corporate body responsible for the internal audit (control) and adoption of an internal audit (control) policy; (4) the existence of the corporate secretary or special structural unit(s) performing the functions of the corporate secretary; and (5) the adoption of a dividend policy.
We are also required to comply with applicable corporate governance requirements of the NYSE. The NYSE permits listed companies that are foreign private issuers, such as Mechel, to follow their home jurisdiction governance practice where it differs from the NYSE requirements.requirements in certain circumstances. In addition, we have voluntarily complied with certain other requirements applicable to U.S. companies under the NYSE Listing Standard 303A. For a summary description of the NYSE Listing Standard 303A showing our compliance therewith and/or the alternative corporate governance practices followed by us see “Item 16G. Corporate Governance.”
Employees
As of December 31, 2017, 20162019, 2018 and 2015,2017, we employed 59,971, 61,45556,182, 59,382 and 65,88859,971 people as follows:
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||
Segment | Total Employees | % Unionized | Total Employees | % Unionized | Total Employees | % Unionized | Primary Location | Total Employees | % Unionized | Total Employees | % Unionized | Total Employees | % Unionized | |||||||||||||||||||||||||||||||||||||||
Mining | 21,933 | 65 | % | 22,452 | 65 | % | 24,322 | 66 | % | | Russia, Switzerland, Singapore | | 19,845 | 61 | % | 21,175 | 65 | % | 21,930 | 65 | % | |||||||||||||||||||||||||||||||
Steel | 33,242 | 55 | % | 34,070 | 58 | % | 36,430 | 61 | % | | Russia, Europe, CIS | | 32,222 | 56 | % | 33,167 | 53 | % | 32,974 | 55 | % | |||||||||||||||||||||||||||||||
Power | 4,203 | 36 | % | 4,288 | 38 | % | 4,447 | 34 | % | Russia | 3,535 | 36 | % | 4,096 | 35 | % | 4,203 | 36 | % | |||||||||||||||||||||||||||||||||
Other | 593 | 10 | % | 645 | 8 | % | 689 | 8 | % | Various | 580 | 9 | % | 944 | 6 | % | 864 | 7 | % | |||||||||||||||||||||||||||||||||
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Total | 59,971 | 57 | % | 61,455 | 59 | % | 65,888 | 61 | % | 56,182 | 56 | % | 59,382 | 55 | % | 59,971 | 57 | % | ||||||||||||||||||||||||||||||||||
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Set out below is information about membership of our employees in trade unions:
Employees of Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant, Southern Urals Nickel Plant, Korshunov Mining Plant, Moscow Coke and Gas Plant, Mechel Coke, Izhstal, Bratsk Ferroalloy Plant, Mechel Materials and Pugachevsky Open Pit are members of the Ore Mining and Smelting Trade Union of Russia.
Employees of Urals Stampings Plant are members of the Trade Union of Machinists of the Russian Federation, employees of Chelyabinsk branch of Urals Stampings Plant are members of the Ore Mining and Smelting Trade Union of Russia.
Employees of Southern Kuzbass Coal Company and its subsidiaries Tomusinsky Open Pit and Vzryvprom are members of the Russian Independent Trade Union of Coal Industry Workers and of the Independent Trade Union of Miners of Russia.
Employees of Yakutugol, NeryungryNeryungri Car Fleet and Mechel-Remservice are members of the Russian Independent Trade Union of Coal Industry Workers.
Employees of Mechel Energo are members of the Ore Mining and Smelting Trade Union of Russia.
Employees of Port Posiet are members of the Russian Stevedores’ Trade Union.
Employees of Mecheltrans’ separate business unit in the city of Myski are members of the Russian Independent Trade Union of Coal Industry Workers.
Employees of Southern Kuzbass Power Plant are members of theAll-Russian Power Industry Trade Union and of the Russian Independent Trade Union of Coal Industry Workers.
Employees of Kuzbass Power Sales Company are members of theAll-Russian Power Industry Trade Union.
Employees of Mechel Nemunas are members of the Trade Union Nemunas.
We consider our relationships with our employees to be good.
Item 7. Major Shareholders and Related Party Transactions
The following table sets forth information regarding our major shareholders, which means shareholders that are the beneficial owners of 5% or more of our common shares, as of March 31, 2018,19, 2020, based on the information available to us:
Name of Beneficial Owner | Number of Common Shares | % of Common Shares | Number of Common Shares | % of Common Shares | ||||||||||||
Igor V. Zyuzin(1) | 110,206,451 | 26.47 | % | 116,857,064 | 28.07 | % | ||||||||||
Irina V. Zyuzina(2) | 77,826,997 | 18.70 | % | 79,907,904 | 19.20 | % | ||||||||||
Ksenia I. Zyuzina | 98,360,505 | 23.63 | % | 112,276,020 | 26.97 | % | ||||||||||
Kirill I. Zyuzin | 77,826,997 | 18.70 | % | 78,454,119 | 18.85 | % | ||||||||||
Other | 207,703,789 | 49.90 | % | 186,761,625 | 44.87 | % | ||||||||||
| (1) | Mr. Zyuzin is the Chairman of our Board of Directors. See “Item 6. Directors, Senior Management and Employees — Directors and Executive Officers.” Mr. Zyuzin may be deemed to be the beneficial owner of approximately |
| (2) | Mrs. Irina Zyuzina may be deemed to be the |
| (3) | Ms. Ksenia Zyuzina may be deemed to be the beneficial owner of approximately 26.97% of our common shares through (i) her record ownership of 0.0001% of our common shares; (ii) her ownership of 33% of the |
| outstanding equity interests in MetHol, which is the record owner of 18.70% of our common shares; (iii) her ownership of 100% of the outstanding equity interests in Bonoro Limited (“Bonoro”), which is |
Mr. Kirill Zyuzin may be deemed to be the beneficial owner of approximately 18.85% of our common shares through (i) his record ownership of 0.0003% of our common shares; (ii) his ownership of 33% of the outstanding equity interests in MetHol, which is the record owner of 18.70% of our common shares; and (iii) his indirect ownership of 29.51% of the outstanding equity interests in Coalmetbank, which is the record owner of 0.15% of our common shares. Further information regarding the shareholdings of Mr. Kirill Zyuzin is available in the Schedule 13D and amendments thereto filed by him with the SEC. |
| (5) | According to Deutsche Bank Trust Company Americas, as of |
We believe our directors and executive officers as a group, other than Mr. Zyuzin and |
None of our common shareholders have voting rights which differ from any other holders of our common shares. Based on our share register, we believe we are not directly or indirectly owned or controlled by another corporation or government, and that there are no arrangements the operation of which may result in a change of control.
Related Party Transactions
See note 98 to our consolidated financial statements in “Item 18. Financial Statements.”
In December 2019, Skyblock Limited, an affiliated company, acquired 1,018,996 common shares (state registration number of issue1-01-55005-E in Mechel PAO) in the course of trading sessions on the Moscow Exchange; the average market price paid per one common share amounted to RUB 61.88. The amount of acquired common shares represents approximately 0.24% of our voting shares.
See “Item 18. Financial Statements.”
Litigation
Other than the legal proceedings described below, we are not involved in any legal proceedings that we believe to be material.
Tax
On January 16, 2012, Mechel Trading House received an assessment from the tax authorities for profit tax, interest and incurred penalties in a total amount of 5.9 billion rubles for the 2008-2009 period. We contested this assessment through the administrative procedure with the higher-level tax authorities which reduced the assessment to 5.5 billion rubles. On June 5, 2012, Mechel Trading House filed a claim with the Moscow Arbitrazh Court to contest the amount of 5.5 billion rubles. On January 9, 2014, the Moscow Arbitrazh Court sustained the Mechel Trading House claims in part of 1.6 billion rubles, including penalties and fines, and the remaining claims were denied. Mechel Trading House did not appeal the decision. On June 19, 2014, the Moscow Arbitrazh Court sustained the application of Mechel Trading House, requesting leave to repay the remaining 3.9 billion ruble assessment on an installment basis by May 2016. On March 15, 2016, Mechel Trading House reapplied with the court for installment payment. On March 31, 2016, the Moscow Arbitrazh Court extended the installment payment until May 2017. On December 14, 2016, Mechel Trading House and the tax authority entered into a settlement agreement under which the payment of the debt is extended until April 25, 2018.
We believe that we have paid or accrued all taxes that are applicable. Where uncertainty exists, we have accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. We accrued RUB 578 million, RUB 760 million and RUB 480 million of tax claims other than income tax that management believes are probable as of December 31, 2017, 2016 and 2015, respectively. In addition, income tax claims that management believes are probable were accrued. See note 20 to the consolidated financial statements.
Antimonopoly
In May 2017, the Office of the FAS for Primorsky Krai found Port Posiet to have violated the Competition Law by preventing access to ships’ agency service market in the port and issued a directive to remedy violation of antimonopoly legislation. In August 2017, Port Posiet filedThe courts, including the appeal and cassation instances, confirmed the legality of a claim with the Arbitrazh Court of Primorsky Krai to appeal the decision and the directive issued by the Office of the FAS for Primorsky Krai. In MarchMay 2018, Port Posiet was fined by the Arbitrazh CourtOffice of the FAS for Primorsky Krai dismissedin the claim. Port Posiet intendsamount of 54 million rubles. Currently, we are challenging the decision to file an appeal withimpose a court of a higher instance.fine.
Environmental and safety
Pursuant to a claim of the Novokuznetsk Environmental Prosecutor’s Office against Southern Kuzbass Power Plant concerning the emission of pollutants into the atmosphere above the maximum allowablepermissible level, the court ruled in September 2008 that we must limit the emission of pollutants into the atmosphere to comply with the maximum allowablepermissible level. We have complied with the ruling effective as of November 2009. The court also mandated us to reconstruct thede-dusting system. Since then, we have applied several times for stay of execution, the last time being in April 2017,May 2019, and the court allowed us to stay execution of this mandate until June 1, 2019.2021. We are continuing with the reconstruction and replacement of the dust and gas scrubber equipment. During 2013-2017,2013-2019, we completed the reconstruction of sixseven of the boilers and have commenced the reconstruction of another boiler.
On June 11, 2013, the Department of Rosprirodnadzor for the Republic of Bashkortostan filed a lawsuit against Beloretsk Metallurgical Plant with the Arbitrazh Court of the Republic of Bashkortostan seeking the recovery of damages caused to water resources as a result ofnon-compliance with water legislation in the amount of 408.2 million rubles. During the court hearings claims under the lawsuit were reduced to 398.6 million rubles. On October 3, 2013, the Arbitrazh Court of the Republic of Bashkortostan rendered a decision to collect from Beloretsk Metallurgical Plant the amount of damages in the amount of 398.6 million rubles. We contested this decision with the Eighteenth Arbitrazh Court of Appeal. On January 28, 2014, the court upheld the decision of the lower court. On February 7, 2014, Beloretsk Metallurgical Plant filed a cassation appeal with the Federal
Arbitrazh Court of Urals District. At the court hearing held on April 14, 2014 Beloretsk Metallurgical Plant withdrew its cassation appeal. On May 27, 2014, the Arbitrazh Court of the Republic of Bashkortostan approved a settlement agreement between Rosprirodnadzor for the Republic of Bashkortostan and Beloretsk Metallurgical Plant. In accordance with the settlement agreement, Beloretsk Metallurgical Plant was obliged to develop project documentation for the technical upgrading and/or reconstruction (construction) of waste treatment facilities system in order to bring the quality of discharged waste water into compliance with applicable regulatory requirements. The reconstruction of waste treatment facilities system was to be completed by December 31, 2016. In November 2016, Beloretsk Metallurgical Plant applied for a stay of execution and the court ruled to complete the reconstruction by December 31, 2023.
In October 2018, the Bratsk Environmental Prosecutor filed a lawsuit against Bratsk Ferroalloy Plant with the Bratsk City Court of Irkutsk region seeking to declare the reclamation of the sludge reservoir illegal and ban it. On February 27, 2019, the Bratsk City Court of Irkutsk region ordered Bratsk Ferroalloy Plant to raise the hazard class of the sludge reservoir by December 1, 2019 in accordance with the specified claims of the Bratsk Environmental Prosecutor. We failed to perform the order, and following the inspection of Rostekhnadzor the remedial period was extended until April 10, 2020.
In February 2020, the Chelyabinsk Environmental Prosecutor filed two lawsuits against Chelyabinsk Metallurgical Plant with the Chelyabinsk Metallurgical District Court seeking to declare illegal actions of discharging insufficiently treated waste water into the river Miass and to compensate for environmental damages in a total amount of 192.6 million rubles. The court hearings are scheduled for March 2020 and will continue onwards.
Commercial litigation
Legal proceedings between Novatek — Chelyabinsk OOO and Chelyabinsk Metallurgical Plant regarding recovery of debt for gas and penalties for payment delay lasted from February 2014 to February 2017. Chelyabinsk Metallurgical Plant fully repaid the principal debt and partially repaid the penalties. In October 2017, settlement agreements on termination of obligations to pay the remaining penalties were approved by the court.
In November 2014, Minmetals initiated proceedings at the Arbitration Institute of the Stockholm Chamber of Commerce against Chelyabinsk Metallurgical Plant to recover alleged amounts due under the construction contract, whereas Chelyabinsk Metallurgical Plant filed its own counter-claims, which include a penalty for delay and recovery of damages for failing to perform works and rectifying works of poor quality. In 2015-2017, both parties submitted a number of procedural statements to the arbitral tribunal and presented arguments during arbitral hearing for the adjustment of claims, so that the final claims of Minmetals amounted to approximately $143.0 million (plus applicable interest) and those by Chelyabinsk Metallurgical Plant to approximately $57.5 million and €4.1 million (plus applicable interest). During the arbitral proceedings, three arbitrators resigned from their duty and in November 2016 new arbitral tribunal was formed. The final arbitral award was
issued on November 9, 2017, awarding Minmetals (in accordance with a set off against the satisfied claims of Chelyabinsk Metallurgical Plant) approximately $16.7 million (plus applicable interest). Chelyabinsk Metallurgical Plant doesdid not agree with the award and on February 9, 2018 filed a petition with the Svea Court of Appeal (state court in Sweden) asking to set aside this award in full.
In February 2018, the Svea Court of Appeal accepted the petition for consideration. The court hearing has not yet been scheduled. In August 2018, Minmetals applied with the Arbitrazh Court of Chelyabinsk region for recognition and enforcement on the territory of the Russian Federation of the award of the Arbitration Institute of the Stockholm Chamber of Commerce. The Arbitrazh Court of Chelyabinsk region suspended the consideration of the Minmetals petition until the termination of the proceedings in the Svea Court of Appeal. In December 2015, ERG SALES AG2018, a higher court upheld the decision of the Arbitrazh Court of Chelyabinsk region.
From September 2017 to December 2019, IDGC of Urals JSC filed a claim17 claims against Chelyabinsk Metallurgical Plant with the LCIA seeking recovery of debt under iron ore feed supply contract in the amount of $10.7 million and penalty for delay in payment in the amount of $513.4 thousand. In June 2016, the LCIA approved a settlement agreement according to which Chelyabinsk Metallurgical Plant was obliged to repay $12.3 million in monthly installments until June 25, 2017. As of December 31, 2017, Chelyabinsk Metallurgical Plant repaid $11.9 million. On March 22, 2018, ERG SALES AG filed a claimMechel Energo with the Arbitrazh Court of Chelyabinsk region seeking recovery of debt for electricity transmission services for the period from July 2017 to oblige Chelyabinsk Metallurgical Plant to repay theNovember 2019 in an aggregate amount of approximately $941.9 thousand.1.4 billion rubles and penalty for delay in payment totaling approximately 110.1 million rubles. Currently, the proceedings under 14 cases are suspended until the first case is considered by the court. The court hearings under two cases are scheduled for March 18 and April 27, 2020. In November 2019, the Arbitrazh Court of Chelyabinsk region sustained the plaintiff’s claims in part of 3.1 million rubles of principal and 0.6 million rubles of penalty under the first case. IDGC of Urals JSC appealed the decision. The court hearing is scheduled for March 19, 2020.
On January 14, 2019, Mechel Trading received a notice dated January 8, 2019 from the Cantonal Court of Zug about an acceptance of court recovery claim of Moorgate Industries UK Limited dated January 3, 2019 regarding the debt of $77.0 million. In April 2019, Mechel Trading filed a limited statement of defense with the Cantonal Court of Zug in which it invoked an arbitration clause and requested that the proceedings be limited to the question of jurisdiction for the time being, which request was granted by the court on May 6, 2019. In September 2019, the court ordered that an expert report of a neutral expert regarding the jurisdiction issue shall be obtained by March 31, 2020. The parties will have the opportunity to comment on the expert report before the Cantonal Court of Zug renders its decision on the question of jurisdiction.
On December 6, 2019, Titan AO filed a claim against Mecheltrans with the Moscow Arbitrazh Court seeking recovery of debt under property sublease agreement in the amount of 616.6 million rubles and penalty in the amount of 29.5 million rubles. On March 12, 2018.2020, the plaintiff increased the amount of claims to 1.3 billion rubles of principal and 130.3 million rubles of penalty. The court hearing is scheduled for March 26, 2020.
Debt litigation
Banks
On March 16,In 2015 we received notice from the LCIA that VTB Bank and VTB Capital Plc had filed 14 requests for arbitration against our group companies. The 14 requests claim amounts allegedly due plus costs and such other, unspecified, relief that the arbitral tribunal may deem appropriate, pursuant to two syndicated credit agreements (one involving Yakutugol and the other involving Southern Kuzbass Coal Company) and 12 deeds of guarantee with respect to those syndicated credit agreements. Under these deeds of guarantee, the guarantors (Mechel, Mechel Mining, Mechel Carbon, Mechel Carbon Singapore, Korshunov Mining Plant, Yakutugol and Southern Kuzbass Coal Company) each guaranteed the obligations of the borrowers (Yakutugol
and Southern Kuzbass Coal Company) under each of the syndicated credit agreements. As of the date of the filing of the requests for arbitration, the claim against Yakutugol as the borrower and the claims against each of the Yakutugol guarantors amount to $16.2 million, and the claim against Southern Kuzbass Coal Company as the borrower and the claims against each of the Southern Kuzbass Coal Company guarantors amount to $16.3 million. OnMarch 17-18, 2015, we received notice from the LCIA concerning the initiation of the 14 arbitration cases described above. On April 13, 2015, the relevant Mechel group companies filed preliminary response letters in respect of the 14 arbitration cases described above. On April 24, 2015, in support of the 14 aforementioned LCIA arbitration proceedings, VTB Bank and VTB Capital Plc filed an arbitration claim with the High Court of Justice Queen’s Bench Division Commercial Court in England seeking injunctive relief to secure their arbitration claims. The first hearing regarding injunctions took place on April 29, 2015. Following the hearing and considering the parties’ positions, the court postponed the hearing until May 18, 2015, however, later due to the restructuring negotiations the parties agreed a moratorium for injunction hearing until July 1, 2015, afterwards the moratorium for hearing and arbitration proceedings has been extended until April 30, 2018.
In February 2017, a number of lenders filed 14 requests for arbitration with the LCIA. The 14 requests claim amounts allegedly due plus costs and such other, unspecified, relief that the arbitral tribunal may deem appropriate, pursuant to two syndicated credit agreements (one involving Yakutugol and the other involving Southern Kuzbass Coal Company) and 12 deeds of guarantee with respect to those syndicated credit agreements. Under these deeds of guarantee, the guarantors (Mechel, Mechel Mining, Mechel Carbon, Mechel Carbon Singapore, Korshunov Mining Plant, Yakutugol and Southern Kuzbass Coal Company) each guaranteed the obligations of the borrowers (Yakutugol and Southern Kuzbass Coal Company) under each of the syndicated credit agreements. As of the date of the filing of the requests for arbitration, the claim against Yakutugol as the borrower and the claims against each of the Yakutugol guarantors was claimed to amount to $230.1 million plus costs, and the claim against Southern Kuzbass Coal Company as the borrower and the claims against each of the Southern Kuzbass Coal Company guarantors was claimed to amount to $231.0 million plus costs. In September 2017, the amounts were updated to $241.1 million plus costs under the Yakutugol syndicated credit agreement and $241.5 million plus costs under the Southern Kuzbass Coal Company syndicated credit agreement. In late 2017 and early 2018, several lenders left the arbitration. Yakutugol and Southern Kuzbass Coal Company contested the jurisdiction of the tribunal but the tribunal dismissed the contest. Yakutugol and Southern Kuzbass Coal Company are appealing this decision. They also submitted counterclaims which are currently under consideration. These recent claims trigger an event of default and cross-default under various loan agreements and our lenders may claim for accelerated repayments. We have requested our major Russian lenders to waive cross-default provisions in this respect, however, no waivers have been granted so far and we have no clarity when, if ever, such waivers will be granted. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — If we are unable to restructure all of our indebtedness or fail to comply with the new terms of the restructured indebtedness, our lenders may claim for accelerated repayment, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects.”
Leasing
In 2014 and 2015, Sberbank Leasing AO filed several lawsuits against Mechel and our subsidiaries with the arbitrazh courts in different regions of the Russian Federation seeking recovery of lease payments, penalties and transfer of leasing assets under equipment finance leases. All litigations with Sberbank Leasing AO were discontinued by signing of settlement agreements with new payment schedules which were approved by the courts during 2016 and 2017.
From June to September 2015 and in March 2016, Caterpillar Financial OOO filed eightseveral lawsuits with the Moscow Arbitrazh Court against Yakutugol, Mechel Engineering, Korshunov Mining Plant, Mechel Materials, Metallurgshakhtspetsstroy, Tomusinsky Open Pitour subsidiaries and Southern Kuzbass Coal Company, as well as Mechel (as the guarantor under foura number of lease agreements) seeking termination of lease agreements, withdrawal of leasing assets and recovery of debt in an aggregate amount of approximately $5.0$5.2 million and €313.9 thousand. During the
period from October 2015 to July 2016, the Moscow Arbitrazh Court sustained the claims regarding the recovery of debt in the amount of approximately $4.5 million and €380.2 thousand and dismissed the claims regarding the withdrawal of leasing assets under six cases; sustained the claims regarding the withdrawal of leasing assets and dismissed the rest of claims under one case; sustained in full the plaintiff’s claims under one case. During the period from October 2015 to November 2016, we appealed all these casesAll litigations with the higher courts. The higher courts upheld the decisions of the Moscow Arbitrazh Court under seven cases and recovered penalty in the amount of approximately $88.6 thousand under one case. In addition, in July 2016, Caterpillar Financial OOO filed a lawsuit with the Moscow Arbitrazh Court against Southern Kuzbass Coal Company seeking withdrawalwere discontinued by signing of a leasing asset under one lease agreement and recovery of debt in an aggregate amount of approximately $235.8 thousand under two other lease agreements. During the court hearings, the court divided the lawsuit into three cases. In January 2017, the Moscow Arbitrazh Court sustained the plaintiff’s claims regarding the withdrawal of the leasing asset and recovery of debt in the amount of approximately $56.6 thousand. In April-December 2017, the Ninth Arbitrazh Court of Appeal approved settlement agreements with new payment schedules under five cases. In 2016 and 2017, we repaid the debt in full under two cases. At present, we expect to sign settlement agreements under four cases to be furtherwhich were approved by the court.
Other
On January 9,court during 2017 Atrix B.V. filed a lawsuit with the Arbitrazh Court of Rostov region against Mechel, Mechel Mining Management, Mechel-Steel Management, NK INVEST OOO and former general director of Rostov Electrometallurgical Plant OOO seeking jointly and severally recovery of damages related to the management of Rostov Electrometallurgical Plant OOO in the amount of approximately 10.1 billion rubles. In February 2017, the amount of claims under the lawsuit was increased to 10.9 billion rubles. In April 2017, the proceedings have been suspended due to judicial expertise. In July 2017, the Arbitrazh Court of Rostov region sustained the claims for recovery of damages in the total amount of approximately 12.7 billion rubles. We appealed this decision with the higher court. The higher court upheld the decision of the Arbitrazh Court of Rostov region. In October 2017, we filed a cassation appeal with the Arbitrazh Court of North Caucasus District. In November 2017, the Arbitrazh Court of North Caucasus District reversed the lower courts decisions and remanded the case for a new proceeding with the court of first instance. On March 13, 2018, the Arbitrazh Court of Rostov region dismissed the claim of Atrix B.V.2019.
Rostov Electrometallurgical Plant OOO and Lomprom Rostov OOO within the bankruptcy cases of Zlatoust Metallurgical Plant AOOAO and Guryevsk Metallurgical Plant OAO (hereinafter referred to as the “debtors”) reviewed in the Arbitrazh Court of Chelyabinsk region and the Arbitrazh Court of Kemerovo region, respectively, requested to hold Mechel secondarily liable for obligations of the debtors. The claimants state that Mechel was the controlling entity in relation to the debtors and pursuant to the Bankruptcy Law should be liable in the amount equal to the aggregate amount of creditor claims that remained unsettled due to insufficiency of the debtors’ property. The amount of claims is not currently defined; the court hearings are scheduled for April 17 and 19, 2018.
defined. On December 1, 2017,August 31, 2018, the Arbitrazh Court of IrkutskKemerovo region helddismissed claims to impose secondary liability on Mechel under the first case. The higher courts upheld the decision of the Arbitrazh Court of Kemerovo region. The dispute regarding the imposition of secondary liability on Mechel is closed. The proceedings in connection with a claim filed byunder the second case are suspended.
In May 2017, Paslentia Investments Ltd. (“Paslentia”) against Mechel and Mechel Mining in favor, a minority shareholder of Korshunov Mining Plant, where Paslentia is a minority shareholder. Paslentia seeks to challenge loans provided by Korshunov Mining Plant in the total amount of 4.2 billion rubles. The court hearing is scheduled for April 11, 2018.
In May 2017, Paslentia filed two claims with the Arbitrazh Court of Irkutsk region seeking invalidation of suretyship agreements entered into between Korshunov Mining Plant and each of Gazprombank and VTB Bank. The court hearings are scheduled for April 10 and September 6, 2018, respectively.
On October 26, 2017, Omia Holdings Limited (“Omia”), a minority shareholder of Guryevsk Metallurgical Plant OAO, filed a claimUnder the suretyship agreements with Gazprombank, the Arbitrazh Court of KemerovoIrkutsk region seeking invalidation of a facility
agreement and a loan agreement entered into by Guryevsk Metallurgical Plant OAO, recognition of Mechel ashigher court dismissed the borrower underclaim in full. Under the facility agreement and imposition of an obligation to repaysuretyship agreements with VTB Bank, the facility on Mechel. The court hearing is scheduled for April 17, 2018.
On March 2, 2018, Boreas Asset Management and Arsagera Asset Management, minority shareholders of Urals Stampings Plant, filed a claim with the Arbitrazh Court of Chelyabinsk region seeking invalidation of loan agreements entered into between Urals Stampings Plant and Mechel. The court hearing is scheduled for May 8, 2018.6, 2020.
Securities litigation
In April 2015, Vadim Varshavsky filed a lawsuit with the Moscow Arbitrazh Court seeking to oblige Mechel and Mechel Steel OOO to perform share purchase agreements by transferring 2,000 shares of our Cypriot company Daveze Limited and to recognize the plaintiff’s title to these shares. In August 2015, the Moscow Arbitrazh Court ruled to terminate the proceedings. Vadim Varshavsky appealed to the higher courts. In December 2015, the Arbitrazh Court of Moscow District reversed the lower courts decisions and remanded the case for a new proceeding. In June 2016, the Moscow Arbitrazh Court dismissed the claim. During the period from October 2016 to August 2017, the higher courts upheld the decision of the Moscow Arbitrazh Court. In November 2017, Vadim Varshavsky filed for review on the basis of newly discovered facts. On March 21, 2018, the Moscow Arbitrazh Court has rejected the review.
Dividend Distribution Policy
We determine the amount of dividends payable on our common shares based on cash needs of our business, which will be influenced by the market situation, results of our operations, the level and availability of debt and debt servicing requirements and the requirements of our capital investment program.
We determine the amount of dividends payable on our preferred shares based on the provisions of our charter.charter and dividend policy approved by the Board of Directors. See “Item 10. Additional Information — Description of Capital Stock — Dividends.”
In addition, some of our credit facility agreements impose certain restrictions on the payment of dividends on our shares. Mechel may not pay dividends on its common shares without the prior written consent of the lenders. The amount of permitted dividends paid on our preferred shares is limited to 7.5 million rubles. In 2017, we received consent from Russian state banks to pay dividends for 2016 on our preferred shares.
The decision to pay dividends and the amount thereof must be recommended by our Board of Directors taking into account the charter’s provisions and approved by our shareholders. The amount of dividends, if any, approved by the shareholders may not be higher than the amount proposed by the Board of Directors. In particular, dividends may be declared and paid only out of net profits calculated under the Russian accounting standards and as long as the following conditions have been met:
our charter capital has been paid in full;
the value of our net assets, calculated under the Russian accounting standards, is not less (and would not become less as a result of the proposed dividend payment) than the sum of our charter capital, our reserve fund and the difference between the liquidation value and the par value of our issued and outstanding preferred shares;
we have repurchased all shares from shareholders having the right to demand repurchase; and
we are not, and would not become, insolvent as the result of the proposed dividend payment.
For a further description, please refer tosee “Item 10. Additional Information — Description of Capital Stock — Dividends.” See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Shares and ADSs and the Trading Market — Our ability to pay dividends depends primarily upon receipt of sufficient funds from our subsidiaries.”
On June 28, 2019, our general shareholders’ meeting decided not to pay dividends for 2018 on common shares and declared a dividend of 2,526.8 million rubles on preferred shares (of which 1,010.7 million rubles was paid to Skyblock Limited), which was paid in August 2019. On June 29, 2018, our general shareholders’ meeting decided not to pay dividends for 2017 on common shares and declared a dividend of 2,311.7 million rubles on preferred shares (of which 809.1 million rubles was paid to Skyblock Limited), which was paid in August 2018. On June 30, 2017, our general shareholders’ meeting decided not to pay dividends for 2016 on common shares and declared a dividend of 1,426.4 million rubles on preferred shares (of which 570.6 million rubles was paid to Skyblock Limited), which was paid in July and August 2017. On June 30, 2016, our general shareholders’ meeting decided not to pay dividends for 2015 on common shares and declared a dividend of 6.9 million rubles on preferred shares (of which 2.8 million rubles was paid to Skyblock Limited), which was paid in July and August 2016. On June 30, 2015, our general shareholders’ meeting decided not to pay dividends for 2014 on common shares and declared a dividend of 6.9 million rubles on preferred shares (of which 2.8 million rubles was paid to Skyblock Limited), which was paid in July and August 2015. In each case we could not pay insignificant amounts of dividends to those shareholders who did not provide us with their bank account details and/or due to the restriction of shareholders’ rights to receive dividends in certain cases provided for by Russian law.
We anticipate that any dividends we may pay in the future on shares represented by ADSs will be declared and paid to the depositary in rubles (subject to Russian withholding tax) and will be converted into U.S. dollars
by the depositary and distributed to holders of ADSs, net of the depositary’s fees and expenses. Accordingly, the value of dividends received by holders of ADSs will be less than the amounts declared and subject to fluctuations in the exchange rate between the ruble and the U.S. dollar. For information on risks associated with Russian withholding tax on dividends to holders of ADSs, see “Item 10. Additional Information — Taxation — Russian Income and Withholding Tax Considerations.”
Significant Changes
Other thanOur current debt repayment schedule, which was agreed with our major Russian lenders in the course of previous restructuring, provides for full debt repayment during the period of 2020-2022. We may not have sufficient funds to meet this debt repayment schedule. In the second half of 2019, we have entered into negotiations with our major Russian lenders in order to extend maturities of our outstanding debt and to reduce our annual principal payments. However, we have not agreed the key terms of the restructuring and there is no clarity as describedto when and if any binding agreements will be entered into in this document, no significant changerelation thereto.
In August 2019, we were notified by Gazprombank of its intention to sell and received an offer to purchase a 34% stake in the Elga coal complex comprised of a 34% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 34% stake in Elga-road OOO, the owner of the Ulak-Elga rail line, and a 34% stake in MecheltransVostok OOO, the rail line’s transport operator. In January 2020, we failed to execute ourpre-emptive right to purchase the stakes as provided for by Russian law, and as a result, Gazprombank is now entitled to sell these stakes to a third party.
In December 2019, we received an offer to sell our business has occurred since December 31, 2017.stake in the Elga coal complex and are currently in negotiations, see “Item 4. Information on the Company — Business Strategy.”
Our common ADSs have been listed on the NYSE under the symbol “MTL” since October 2004. In June 2004, our common shares were listed on Open Joint Stock Company “Russian Trading System” Stock Exchange (“RTS”). In October 2008, our common shares were listed on Closed Joint Stock Company Moscow Interbank Currency Exchange (“MICEX”). RTS and MICEX ceased to exist as a result of their reorganization through accession to Public Joint-Stock Company “Moscow ExchangeMICEX-RTS” (“Moscow Exchange”). Our common shares have been traded on the Moscow Exchange Level 1 quotation list under the symbol “MTLR.”
The following table sets forth the high and low closing prices per common ADS and common share as reported by the NYSE and Moscow Exchange, respectively, for: (1) the most recent six months; (2) the most recent nine quarters; and (3) all years following our initial public offering in 2004. Conversion from rubles into U.S. dollars is made using the CBR exchange rate. Effective January 12, 2016, we changed the ratio of our common shares to common ADSs from 1:1 to 2:1. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Shares and the Trading Market — The price of our shares and ADSs could be volatile and could drop unexpectedly, making it difficult for investors to resell our shares or ADSs at or above the price paid.” The common ADS prices below have been recalculated to reflect the new commonADS-to-common share ratio.
| Common ADSs | Common Shares | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| (In U.S. dollars) | ||||||||||||||||
March 2018 | 4.98 | 4.33 | 2.59 | 2.15 | ||||||||||||
February 2018 | 5.21 | 4.42 | 2.62 | 2.32 | ||||||||||||
January 2018 | 5.54 | 5.03 | 2.70 | 2.58 | ||||||||||||
December 2017 | 5.26 | 4.13 | 2.56 | 2.15 | ||||||||||||
November 2017 | 5.00 | 4.46 | 2.53 | 2.25 | ||||||||||||
October 2017 | 5.26 | 4.92 | 2.67 | 2.51 | ||||||||||||
First Quarter 2018 | 5.54 | 4.33 | 2.70 | 2.15 | ||||||||||||
Fourth Quarter 2017 | 5.26 | 4.13 | 2.67 | 2.15 | ||||||||||||
Third Quarter 2017 | 5.76 | 4.64 | 2.90 | 2.32 | ||||||||||||
Second Quarter 2017 | 6.01 | 4.22 | 3.12 | 2.12 | ||||||||||||
First Quarter 2017 | 6.79 | 4.36 | 3.28 | 2.26 | ||||||||||||
Fourth Quarter 2016 | 6.61 | 2.81 | 3.21 | 1.41 | ||||||||||||
Third Quarter 2016 | 2.90 | 1.46 | 1.44 | 0.82 | ||||||||||||
Second Quarter 2016 | 2.15 | 1.56 | 1.03 | 0.80 | ||||||||||||
First Quarter 2016 | 2.05 | 1.29 | 0.94 | 0.69 | ||||||||||||
2017 | 6.79 | 4.13 | 3.28 | 2.12 | ||||||||||||
2016 | 6.61 | 1.29 | 3.21 | 0.69 | ||||||||||||
2015 | 3.65 | 1.26 | 1.51 | 0.44 | ||||||||||||
2014 | 5.12 | 0.87 | 1.99 | 0.28 | ||||||||||||
2013 | 14.80 | 3.94 | 7.22 | 1.72 | ||||||||||||
2012 | 24.74 | 10.54 | 11.89 | 5.35 | ||||||||||||
2011 | 69.18 | 15.80 | 32.74 | 8.05 | ||||||||||||
2010 | 61.60 | 34.90 | 30.11 | 17.64 | ||||||||||||
2009 | 43.64 | 5.14 | 17.81 | 2.29 | ||||||||||||
2008 | 115.24 | 7.32 | 45.00 | 4.10 | ||||||||||||
2007 | 69.26 | 15.82 | 25.71 | 8.30 | ||||||||||||
2006 | 20.64 | 12.68 | 10.20 | 6.25 | ||||||||||||
2005 | 24.34 | 14.04 | 11.20 | 7.75 | ||||||||||||
2004 | 14.96 | 10.52 | 17.00 | 0.36 | ||||||||||||
Our preferred ADSs have been listed on the NYSE under the symbol “MTL PR” since May 2010. In April 2011, our preferred shares were admitted to trading without listing on RTS and MICEX. In July 2011, our preferred shares were listed on MICEX. RTS and MICEX ceased to exist as a result of their accession to Moscow Exchange. Our preferred shares have been traded on the Moscow Exchange Level 1 quotation list under the symbol “MTLRP.”
The following table sets forth the high and low closing prices per preferred ADS and preferred share as reported by the NYSE and Moscow Exchange, respectively, for: (1) the most recent six months; (2) the most
recent nine quarters; and (3) all years following the public offering in 2010. Conversion from rubles into U.S. dollars is made using the CBR exchange rate. Each preferred ADS representsone-half of a preferred share.
| Preferred ADSs | Preferred Shares | |||||||||||||||
| High | Low | High | Low | |||||||||||||
| (In U.S. dollars) | ||||||||||||||||
March 2018 | 1.32 | 1.20 | 2.61 | 2.48 | ||||||||||||
February 2018 | 1.27 | 1.10 | 2.68 | 2.41 | ||||||||||||
January 2018 | 1.27 | 1.07 | 2.61 | 2.42 | ||||||||||||
December 2017 | 1.05 | 0.86 | 2.29 | 1.86 | ||||||||||||
November 2017 | 1.12 | 0.80 | 2.01 | 1.54 | ||||||||||||
October 2017 | 1.09 | 0.85 | 1.79 | 1.64 | ||||||||||||
First Quarter 2018 | 1.32 | 1.07 | 2.68 | 2.41 | ||||||||||||
Fourth Quarter 2017 | 1.12 | 0.80 | 2.29 | 1.54 | ||||||||||||
Third Quarter 2017 | 1.23 | 0.89 | 2.10 | 1.71 | ||||||||||||
Second Quarter 2017 | 1.24 | 0.85 | 2.29 | 1.63 | ||||||||||||
First Quarter 2017 | 1.32 | 0.98 | 2.74 | 2.15 | ||||||||||||
Fourth Quarter 2016 | 1.15 | 0.55 | 2.44 | 1.19 | ||||||||||||
Third Quarter 2016 | 0.59 | 0.21 | 1.19 | 0.55 | ||||||||||||
Second Quarter 2016 | 0.30 | 0.22 | 0.66 | 0.53 | ||||||||||||
First Quarter 2016 | 0.29 | 0.20 | 0.59 | 0.46 | ||||||||||||
2017 | 1.32 | 0.80 | 2.74 | 1.54 | ||||||||||||
2016 | 1.15 | 0.20 | 2.44 | 0.46 | ||||||||||||
2015 | 0.46 | 0.09 | 1.03 | 0.30 | ||||||||||||
2014 | 0.47 | 0.08 | 1.09 | 0.17 | ||||||||||||
2013 | 2.23 | 0.39 | 4.11 | 1.01 | ||||||||||||
2012 | 4.91 | 1.92 | 11.82 | 3.86 | ||||||||||||
2011 | 11.27 | 3.24 | 8.99 | 6.15 | ||||||||||||
2010 | 9.66 | 6.60 | n/a | n/a | ||||||||||||
Item 10. Additional Information
Charter and Certain Requirements of Russian Legislation
We describe below and in Exhibit 2.1 to this Annual Report our registered common and preferred shares, the material provisions of our charter in effect on the date of this document and certain requirements of Russian legislation. In addition to this description, we urge you to review our charter, which is included as an exhibit to this document, to review its complete terms. The description of our charter is qualified in its entirety by reference to the charter.
Our Purpose
Article 4.1 of our charter provides that our primary purpose is to earn profit, as well as to provide the highest-quality products and services for our customers.
Description of Capital Stock
General
Pursuant to our charter, we have the right to issue registered common shares, preferred shares and other securities provided for by the legislation of the Russian Federation with respect to securities. Our capital stock currently consists of 555,027,660 shares, including 416,270,745 common shares, each with a nominal value of 10 rubles, and 138,756,915 preferred shares, each with a nominal value of 10 rubles, all of which are fully paid, issued and outstanding under Russian law. Our preferred shares are not convertible into common shares, bonds or other securities of Mechel. Under Russian legislation, charter capital refers to the aggregate
nominal value of the issued and outstanding shares. We are authorized to issue an additional 81,698,341 common shares with a nominal value of 10 rubles each. None of our capital stock is under option or agreed conditionally or unconditionally to be put under option. Any of our shares that are owned by our subsidiaries are not considered treasury shares under Russian law (i.e., they are considered outstanding shares), and we are able to vote such shares and dispose of such shares without any further corporate actions by our shareholders or Board of Directors, provided that such disposals are not major or interested party transactions. Currently, our wholly-owned subsidiary Skyblock Limited holds 55,502,76654,793,636 preferred shares. The shares are considered issued and outstanding shares under Russian law and have all the rights attaching to other preferred shares. The preferred shares owned by Skyblock Limited are not considered outstanding for purposes of our IFRS financial statements. In December 2019, Skyblock Limited acquired 1,018,996 common shares representing approximately 0.24% of our voting shares.
Currently, we have more than 1,00010,000 holders of voting shares, which determines the applicability of certain provisions of the Joint-Stock Companies Law, as described below.
A resolutionFor detailed description of our Board of Directors dated May 14, 2008 approved an increase in our charter capital through the issuance of 55,000,000 preferred shares with a nominal value of 10 rubles. On September 19, 2008, our Board of Directors amended its resolutionsecurities, see Exhibit 2.1 to increase the number of preferred shares being issued to 138,756,915 preferred shares which is the maximum number of preferred shares authorized by our charter. The decision to issue 138,756,915 preferred shares was registered with the FFMS on October 23, 2008. On April 2, 2009, we placed all 138,756,915 of the preferred shares authorized for issuance at the placement price of 10 rubles per share. All the preferred shares were taken up by our wholly-owned subsidiary Skyblock Limited, which was the sole offeree. A report on the placement of the preferred shares was registered with the FFMS on April 14, 2009. We transferred 83,254,149 preferred shares to the sellers of 100% of the shares and interest of Bluestone Industries, Inc., Dynamic Energy, Inc. and JCJ Coal Group, LLC and certain other companies as part of the consideration in our acquisition of the Bluestone. Our preferred shares are not convertible into common shares, bonds or other securities of Mechel.
Rights attaching to common shares
Holders of our common shares have the right to vote at general shareholders’ meetings. As required by the Joint-Stock Companies Law and our charter, all of our common shares have the same nominal value and grant to their holders identical rights. Each fully paid common share, except for treasury shares, gives its holder the right to:
Rights attaching to preferred shares
Pursuant to our charter, all of our preferred shares have the same nominal value and grant to their holders identical rights. Each fully paid preferred share gives its holder the right to:
Annual Report.
Pre-emptive rights
The Joint-Stock Companies Law and our charter provide existing shareholders with apre-emptive right to purchase additional shares or securities convertible into shares issued by way of open subscription in an amount proportionate to their existing holding of shares of the same category (type) as the newly issued shares. In addition, the Joint-Stock Companies Law and our charter provide shareholders with apre-emptive right to purchase shares or securities convertible into shares during a closed subscription if the shareholders voted against or did not participate in the voting on the decision approving such subscription. Thepre-emptive right does not apply to placement of shares or other securities convertible into shares through a closed subscription among existing shareholders only, provided that such shareholders may each acquire a whole number of shares or other securities convertible into shares being placed in an amount proportionate to their existing holding of shares of the corresponding category (type). We must notify shareholders of the opportunity to exercise theirpre-emptive rights and the period thereof in accordance with the procedure and time limits provided by Russian law.
Dividends
The Joint-Stock Companies Law and our charter set forth the procedure for determining the dividends that we distribute to our shareholders. Shareholders may decide on whether or not to pay the dividends upon results of a reporting quarter, half a year, nine months and/or year. Dividends are recommended to a general shareholders’ meeting by the board of directors, and approved by the general shareholders’ meeting by a majority vote. A decision on quarterly dividends may be taken at a general shareholders’ meeting within three months of the end of the respective quarter; a decision on annual dividends must be taken at the annual general shareholders’ meeting. The company shall not be entitled to resolve (declare) on payment of dividends on common and preferred shares, the amount of dividends on which has not been determined, unless it is resolved to fully pay dividends on all types of preferred shares, the amount of dividends on which is determined by the company’s charter. The dividend approved at the general shareholders’ meeting may not be more than the amount recommended by the board of directors. The date on which in accordance with the decision on payment (declaration) of dividends are determined the persons entitled to receive them, cannot be earlier than 10 days from the date of the decision to pay (declare) dividends and later than 20 days from the date of such decision. Dividends are not paid on treasury shares. Dividend payment period to a nominee holder and a trustee who is a professional participant of the securities market, which are registered in the register of shareholders, shall not exceed 10 business days, and to other persons registered in the register of shareholders shall not exceed 25 business days from the date on which the persons entitled to receive dividends are defined. A shareholder who is entitled to the declared dividends but has not received them due to the fact that the company or the registrar has no exact and necessary address information or bank details, or in connection with the other creditor’s delay, has a right to make a claim to the company for the unpaid dividends within three years from the date of the decision on their payment. Upon the expiration of this three year period, declared and unclaimed dividends are restored in retained earnings of the company and the obligation on their payment terminates.
Starting from January 1, 2014, a new “cascade” dividend payment mechanism is introduced with respect to shares recorded on custodians’ account as opposite to the shareholders’ register. The cascade payment mechanism provides that Russian issuers will pay dividends to the NSD for further transfer to nominee holders
(custodians), who in turn will be obliged to further transfer dividends to their clients (shareholders, foreign nominee holders and depositary banks for further transfer to depositary receipt owners). Under the new regime no disclosure will be required by ultimate beneficial owners in order to receive dividends. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Shares and the Trading Market — Upon introduction of a system of recording the depositary’s rights to the shares underlying depositary receipts, the depositary is required to disclose information on ADS and GDS owners in order to exercise voting rights and receive dividends with respect to the shares underlying ADSs and GDSs.”
The Joint-Stock Companies Law allows dividends to be declared only out of net profits calculated under the Russian accounting standards and as long as the following conditions have been met:
Pursuant to our charter, we may calculate the dividends for preferred shares on the basis of our consolidated financial statements prepared under accepted international accounting standards which we apply for the relevant accounting period, including IFRS and U.S. GAAP. The annual fixed dividend for one preferred share amounts to 20% of our net profit under our annual consolidated financial statements prepared in accordance with the applicable international accounting standards and audited by an independent auditor, divided by 138,756,915, and is declared and paid subject to sufficiency of the company’s net profit for those purposes.
If the dividend to be paid for one common share exceeds the dividend to be paid for one preferred share for the same year, we must increase the dividend to be paid for one preferred share up to the amount of dividend to be paid for one common share. For this purpose, if the nominal value of our common shares has changed (e.g., through a share split), the dividend to be paid for one common share is calculated as if its nominal value has not changed. If dividends for common shares are to be paid in kind, the monetary valuation of the property directed for dividend payment must be determined by the Board of Directors involving an independent appraiser.
Distributions to shareholders on liquidation
Under Russian legislation, liquidation of a company results in its termination without the transfer of rights and obligations to other persons as legal successors. The Joint-Stock Companies Law and our charter allow us to be liquidated:
Following a decision to liquidate the company, the right to manage our affairs would pass to a liquidation commission which, in the case of voluntary liquidation, is appointed by a general shareholders’ meeting and, in an involuntary liquidation, is appointed by the court. Creditors may file claims within a period to be determined by the liquidation commission, but which may not be less than two months from the date of publication of notice of liquidation by the liquidation commission.
The Civil Code gives creditors the following order of priority during liquidation:
Claims of creditors in connection with obligations secured by a pledge of the company’s property (“secured claims”) are satisfied out of the proceeds of the sale of the pledged property prior to claims of any other creditors except for the creditors of the first and second priorities described above, provided that claims of such creditors arose before the pledge agreements in respect of the company’s property were made. To the extent that the proceeds of sale of the pledged property are not sufficient to satisfy secured claims, the latter are satisfied simultaneously with claims of the fourth priority creditors as described above.
The Joint-Stock Companies Law and our charter provide for the following order of priority for distribution of remaining assets after settlement with creditors:
Liability of shareholders
The Civil Code and the Joint-Stock Companies Law generally provide that shareholders in a Russian joint-stock company are not liable for the obligations of a joint-stock company and bear the risk of losses within the value of their shares. This may not be the case, however, when one entity is capable of determining decisions made by another entity. The entity capable of determining such decisions is called an “effective parent.” The entity whose decisions are capable of being so determined is called an “effective subsidiary.” The effective parent bears joint and several responsibility for transactions concluded by the effective subsidiary in course of carrying out these decisions if:
Thus, a shareholder of an effective parent is not itself liable for the debts of the effective parent’s effective subsidiary, unless that shareholder is itself an effective parent of the effective subsidiary. Accordingly, a shareholder will not be personally liable for our debts or those of our effective subsidiaries unless such shareholder controls our business and the conditions set forth above are met. See “Risk Factors — Legal risks and uncertainties — Shareholder liability under Russian legislation could cause us to become liable for the obligations of our subsidiaries.”
In addition, an effective parent is secondarily liable for an effective subsidiary’s debts if an effective subsidiary becomes insolvent or bankrupt resulting from the fault of an effective parent only when the effective parent has used the right to give binding instructions, knowing that the consequence of carrying out this action would be insolvency or bankruptcy of this effective subsidiary. This is the case regardless of how the effective parent’s capability to determine decisions of the effective subsidiary arises, for example, whether through ownership of voting securities or by contract. If the effective subsidiary is a joint-stock company, the effective parent has secondary liability only if the effective parent has caused the effective subsidiary to take any action or
fail to take any action, knowing that such action or failure to take action would result in insolvency or bankruptcy of the effective subsidiary. If the effective subsidiary is a limited liability company, the effective parent may be held secondarily liable if the effective subsidiary’s insolvency is caused by the willful misconduct or negligence of such effective parent and if the effective subsidiary’s assets are insufficient to cover its obligations. To be relieved from the liability, the effective parent would need to prove before the court that it acted in good faith and in the interests of the effective subsidiary.
Shareholders of an effective subsidiary that is a joint-stock company may also claim compensation for the effective subsidiary’s losses from the effective parent if: (1) the effective parent caused the effective subsidiary to take any action or fail to take any action that resulted in a loss and (2) the effective parent knew that such action or failure to take such action would result in an effective subsidiary’s loss. Members of an effective subsidiary that is a limited liability company may claim compensation for the effective subsidiary’s losses from the effective parent if the effective parent through its willful misconduct or negligence caused the effective subsidiary to take any action that resulted in a loss.
Russian law also provides for other cases in which shareholders may be held liable to us.
Charter capital increase
We may increase our charter capital by:
A decision on any issuance of shares or securities convertible into shares by closed subscription, or an issuance by open subscription of common shares or securities convertible into common shares constituting more than 25% of the number of issued common shares, requires a three-quarters majority of the voting stock present at a general shareholders’ meeting. A decision to increase the charter capital by increasing the nominal value of issued shares requires a majority of the voting stock present at a general shareholders’ meeting. In addition, the issuance of shares above the number of authorized andnon-issued shares provided in our charter necessitates a charter amendment, which requires a three-quarters majority of the voting stock present at a general shareholders’ meeting.
The Joint-Stock Companies Law requires that the value of newly issued shares be determined by the board of directors based on their market value but not less than their nominal value, except in limited circumstances where: (1) existing shareholders exercise apre-emptive right to purchase shares at the price which is not more than 10% lower than the price paid by third parties, or (2) fees of up to 10% are paid to intermediaries. The price may not be set at less than the nominal value of the shares. The board of directors shall value anyin-kind contributions for new shares, based on the appraisal report of an independent appraiser.
Russian securities regulations set out detailed procedures for the issuance and registration of shares of a joint-stock company. These procedures require:
Charter capital decrease
The Joint-Stock Companies Law does not allow a company to reduce its charter capital below the minimum charter capital required by law, which is 100,000 rubles for a public joint-stock company. The Joint-Stock Companies Law and our charter require that any decision to reduce our charter capital, whether through a repurchase and cancellation of shares or a reduction in the nominal value of the shares, be made at a general shareholders’ meeting.
The Joint-Stock Companies Law allows a company to reduce its share capital only if, at the time of such reduction:
In addition, within three business days after taking the decision to reduce our charter capital, we must notify this decision to the authority which carries out state registration of legal entities and publish this decision twice with a monthly interval. Within 30 days of the latest of such publications, our creditors, whose claim rights arose prior to the publication, have the right to demand early performance of the relevant obligation by our company, and if early performance is not possible to terminate the obligation and reimburse related losses.
Sharebuy-back
Under the Joint-Stock Companies Law and our charter, our general meeting of shareholders and our board of directors are entitled to decide on the acquisition of our shares representing up to 10% of our charter capital. The repurchased shares must be resold at a value not less than a market value within one year of their repurchase or, failing that, the shareholders must decide to cancel such shares and decrease the charter capital. Repurchased shares do not bear voting rights.
The Joint-Stock Companies Law allows us to repurchase our shares only if:
The Joint-Stock Companies Law and our charter provide that our shareholders may demand repurchase of all or some of their shares if the shareholder demanding repurchase voted against or did not participate in the voting on the decision approving any of the following actions:
A shareholder demanding repurchase must send to us a written request within 45 days following the date when the relevant decision of the general shareholders’ meeting is taken. We must purchase the shares of the demanding shareholder within 30 days following the expiration of the above45-day period. We may spend up to 10% of our net assets calculated under the Russian accounting standards on the date of the adoption of the decision which gives rise for a share redemption demanded by the shareholders. If the value of shares in respect of which shareholders have exercised their right to demand repurchase exceeds 10% of our net assets, we will repurchase shares from each such shareholder on apro-rata basis.
A shareholders’ decision on filing of an application for delisting of our shares enters into effect if the consideration to be paid for the repurchase of shares does not exceed 10% of our net assets.
Registration and transfer of shares
Russian legislation requires that a joint-stock company maintain a register of its shareholders which, for a public joint-stock company, shall be maintained by a registrar. Since July 2014, our shareholder register has been maintained by Computershare Registrar JSC which was renamed to Independent Registrar Company JSC in October 2015. Ownership of our shares is evidenced by entries made in the shareholders’ register or on the books of a Russian licensed depositary.
The Federal LawNo. 414-FZ “On the Central Depositary” dated December 7, 2011 (the “Central Depositary Law”), which came into force on January 1, 2012, set out a legal framework for establishment and operation of the central depositary. On November 6, 2012, the FFMS granted the NSD the status of central depositary which opened its nominee holder accounts in, among others, all securities registers of the issuers which are obliged to disclose information in accordance with Russian securities law. As we are required to make public disclosures, the above requirement is applicable to us, which means that the central depositary became the only person having a nominee holder account in our share register. Also, the Central Depositary Law prohibits persons maintaining securities registers from opening and depositing securities (save for limited exceptions) to other nominee holder accounts from the date of the opening of a nominee holder account with the central depositary.
Any of our shareholders may obtain an extract from the register of our shareholders maintained by the registrar or from their respective depositary, as the case may be, certifying the number of shares that such shareholder holds. We are entitled to obtain an extract from our shareholders’ register which sets out all of our shareholders registered directly therein in cases provided under Russian law. In addition, we are entitled to request through the registrar a list of clients of nominee holders which are entitled to participate in the general shareholders’ meeting. However, we are unable to monitor transfers of our shares that are held on the books of depositaries registered with the central depositary because underlying shareholders have no obligation to reveal and such depositaries have no obligation to notify us about such transfers. As a result, we can currently only identify our actual shareholders in a limited number of cases provided for by Russian law, including when requesting our registrar to compile a list of shareholders of record for the general shareholders’ meeting and when shareholders and ADSs or GDSs holders provide voting instructions together with disclosure of information, including ownership information, in accordance with Russian securities regulations.
Our shareholders and beneficial owners of our shares shall notify us and the CBR of an acquisition of 5% or more of our common shares or of an acquisition of the right to vote on 5% or more of our common shares by virtue of an agreement or otherwise, and of any subsequent change in the number of such common shares above or below 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% or 95% of the total amount of votes attached to the voting shares in the charter capital, and we are required to disclose such information in accordance with Russian securities regulations.
The purchase, sale or other transfer of shares is accomplished through the registration of such transfer in the shareholder register, or the registration of such transfer with a depositary if shares are held and recorded by a depositary. The registrar or depositary may not require any documents in addition to those required by Russian legislation in order to transfer shares in the register or with a depositary. Refusal to register the shares in the name of the transferee or, upon request of the beneficial holder, in the name of a nominee holder, is not allowed except in certain instances provided for by Russian legislation, and may be challenged in court.
Reserve fund
Russian legislation requires that each joint-stock company establish a reserve fund to be used only to cover the company’s losses, redeem the company’s bonds and repurchase the company’s shares in cases when other funds are not available. Our charter provides for a reserve fund of 5% of our charter capital, funded through mandatory annual transfers of at least 5% of our statutory net profits until the reserve fund has reached the 5% requirement.
Disclosure of Information
Under Russian legislation, disclosure of information on the securities market means making it available to all interested parties, regardless of the purpose of obtaining this information. We are required to make the following periodic public disclosures and filings in the newswire of authorized information agency Interfax (www.e-disclosure.ru), on our websites atwww.mechel.ruand www.mechel.com, as well as on the webpage provided by authorized information agency Interfax (www.e-disclosure.ru/portal/company.aspx?id=1942):
disclosure of quarterly reports containing information about us, our shareholders, registrar and depositary, the structure of our management bodies, the members of the board of directors and management board, and review commission, our branches and representative offices, our subsidiaries and affiliates, our shares, bank accounts and auditors, important developments during the reporting quarter, quarterly accounting statements prepared in accordance with the Russian accounting standards, and other information about our financial and business activity;
disclosure of any information concerning material facts and other official disclosures, including, among other things, our reorganization; certain changes in the amount of our assets; decisions on share issuances; certain changes in ownership and shareholding; information about controlled organizations which are material to us or organizations controlling us, reorganization, liquidation or bankruptcy of such organizations; conclusion of agreement with our controlled or controlling organization, where we are required to buy securities issued by such controlled or controlling organization; as well as shareholder and management bodies resolutions;
notifying Moscow Exchange about the disclosure of aforementioned information;
disclosure of the documents that we have received in connection with any of the following:
a voluntary offer (including any competing offer) to acquire us;
a mandatory offer (including any competing offer) to acquire us;
a notice of the right of shareholders to sell their shares to the person that has acquired more than 95% of our common shares; and
disclosure of information on various stages of securities placement, issuance and registration through publication of certain data as required by the securities legislation;
disclosure of our charter and internal corporate governance documents;
disclosure of our annual report and annual financial statements prepared in accordance with the Russian accounting standards and our annual and interim IFRS financial statements;
disclosure on a quarterly basis of a list of our affiliated companies and individuals;
disclosure of a list of information which is considered an insider information and approved by the company (“insider information”);
disclosure of insider information; and
disclosure of other information as required by applicable Russian securities legislation.
On January 1, 2020, new disclosure rules (which were enacted by the Federal LawNo. 514-FZ “On amendments to the Federal Law “On Securities Market” and other legislative acts” on December 27, 2018) have entered into force. Pursuant to these rules, among other things, issuers are obligated to determine independently which information is material and must be disclosed. At that, the CBR may adopt additional regulations related to disclosure of information based on a company’s field of business and size as well as on the category (type) of securities issued and type of listing of such securities.
In addition, new rules on insider information have entered into force, starting from May 1, 2019. Issuers are obligated to maintain their own lists of insider information, which should include, among other things, a list of insider information established by the CBR.
General Meetings of Shareholders
Procedure
A general shareholders’ meeting may exercise only the powers that are set forth in the Joint-Stock Companies Law and in our charter. Among the issues which our shareholders have the exclusive power to decide are:
approval of charter amendments or of a new version of the charter;
reorganizations or liquidations;
election and early removal of the members of the board of directors;
determination of the number, nominal value and type of authorized shares and rights granted by such shares;
changes in the company’s charter capital;
appointment and early removal of the members of our review commission andthe counting commission;
approval of our independent auditor;
consent or subsequent approval of certain interested party transactions and major transactions;
distribution of profits and losses, including approval of dividends payment;
decisions on our participation in commercial or industrial groups or other associations of commercial entities;
redemption by the company of issued shares in cases provided for by the Joint-Stock Companies Law;
approval of certain internal documents regulating the activity of our governing bodies;
decision on filing of an application for delisting of our shares or securities convertible into shares; and
other issues, as provided by the Joint-Stock Companies Law and our charter.
Voting at a general shareholders’ meeting is generally carried out on the principle of one vote per voting share, with the exception of the election of the board of directors, which is done through cumulative voting. Decisions are generally passed by a majority of the voting stock present at a general shareholders’ meeting.
However, Russian law requires a three-quarters majority of the voting stock present at a general shareholders’ meeting to approve the following:
approval of charter amendments or of a new version of the charter;
reorganizations or liquidations;
determination of the number, nominal value and category (type) of authorized shares and the rights granted by such shares;
repurchase by the company of its issued shares;
any issuance of shares or securities convertible into common shares by closed subscription;
issuance by open subscription of common shares or securities convertible into common shares, in each case, constituting 25% or more of the number of issued and outstanding common shares;
consent or subsequent approval of a major transaction the subject matter of which is property with the value exceeding 50% of the balance sheet value of the company’s assets; and
decision on filing of an application for delisting of our shares or securities convertible into shares.
A resolution of the shareholders’ meeting to apply for delisting of our preferred shares requires a three-quarters majority vote of the voting common stock present at the meeting and a three-quarters majority vote of the total preferred stock. The Joint-Stock Companies Law provides that a charter may require a larger number of the votes for passing such resolution.
The quorum requirement for our general shareholders’ meeting is met if shareholders (or their representatives) accounting for more than 50% of the issued voting shares are present. If the quorum requirement is not met, another general shareholders’ meeting with the same agenda may (and, in the case of an annual meeting, must) be scheduled and the quorum requirement is satisfied if shareholders (or their representatives) accounting for at least 30% of the issued voting shares are present at that meeting.
The annual general shareholders’ meeting must be convened by the board of directors and be held between March 1 and June 30 of each year, and the agenda must include the following items:
election of the members of the board of directors and review commission;directors;
approval of distribution of profits, including approval of annual dividends and losses, if any; and
appointment of an independent auditor.
A shareholder or group of shareholders owning in the aggregate at least 2% of the outstanding voting shares may introduce proposals for the agenda of the annual general shareholders’ meeting and may nominate candidates to the board of directors general director and the review commission.general director. Any agenda proposals or nominations must be provided to the company not later than 45 days after the preceding calendar year ends.
Extraordinary general shareholders’ meetings may be called either by the board of directors on its own initiative, or at the request of the review commission, the independent auditor of the statutory accounts or a shareholder or group of shareholders owning in the aggregate at least 10% of the issued voting shares as of the date of the request.
A general shareholders’ meeting may be held in a form of a meeting or by an absentee ballot. The form of a meeting contemplates the adoption of resolutions by the general shareholders’ meeting through the attendance of the shareholders or their authorized representatives for the purpose of discussing and voting on issues of the agenda, provided that if a ballot is mailed to shareholders for participation at a meeting convened in such form, the shareholders may complete and mail the ballot back to the company without personally attending the meeting. A general shareholders’ meeting by absentee ballot contemplates the determination of shareholders’ opinions on issues on the agenda by means of a written poll.
The following issues cannot be decided by a general shareholders’ meeting by absentee ballot:
approval of a company’s independent auditor for statutory accounts.
The voting ballots, which must be used when conducting a general shareholders’ meeting in form of a meeting in a joint-stock company, must be sent to persons registered in the register of shareholders and entitled to participate in the general shareholders’ meeting at least 20 days in advance of the general shareholders’ meeting.
Notice and participation
Persons registered in the register of shareholders and entitled to participate in a general shareholders’ meeting must be notified of the meeting, whether the meeting is to be held in direct form or by absentee ballot, not less than 30 days prior to the date of the meeting, and such notification shall specify the agenda for the meeting. However, if it is an extraordinary general shareholders’ meeting to elect the board of directors or it is a general shareholders’ meeting to elect the board of directors of a reorganized company, persons registered in the register of shareholders and entitled to participate in the general shareholders’ meeting must be notified at least 50 days prior to the date of the meeting. Under our charter, a notice of the general shareholders’ meeting shall be published on our sitewebsite www.mechel.ru in the information and telecommunication network Internet.. It also may be sent by post or delivered against signature, as well as published in the Russian official newspaperRossiyskaya Gazeta. Moreover, other means of mass media (television, radio) can be used. Only those items that were set out in the agenda may be voted upon at a general shareholders’ meeting. In addition, nominee holders included in the shareholder register will be notified of the shareholders’ meeting by way of an electronic communication and will be required to convey such information to the depositors within a prescribed period.
In accordance with Russian law and our charter, we may notify persons registered in the register of shareholders and entitled to participate in the general shareholders’ meeting of a meeting by sending an electronic message to the email address of a shareholder, as well as by sending the text message containing the procedure for reviewing the notice of the general meeting of shareholders at the contact phone number or email address of a shareholder.
In accordance with Russian law and our charter, a list of persons entitled to participate in the general shareholders’ meeting is compiled by the registrar of the company pursuant to the regulations of Russian securities law. It is compiled on the basis of the data from the register, as well as taking into account information provided to the registrar by the nominee holder to whom the relevant client account was opened in the register. The owners of the company’s shares are not included in the list if the nominee holder has not submitted to the registrar information about them. The list of persons entitled to participate in the general shareholders’ meeting is compiled on the date established by the board of directors, which date may neither be earlier than 10 days from the date of adoption of the resolution to hold a general shareholders’ meeting nor more than 25 days before the
date of the meeting (or, in the case of an extraordinary general shareholders’ meeting to elect the board of directors, not more than 55 days before the date of the meeting).
The right to participate in a general shareholders’ meeting may be exercised by shareholders as follows:
by personally participating in the discussion of agenda items and voting thereon;
by sending an authorized representative to participate in the discussion of agenda items and to vote thereon;
by absentee ballot;
by delegating the right to fill out the absentee ballot to an authorized representative; or
The Federal LawNo. 415-FZ also sets forth obligations for a depositary to disclose information on depositary receipt owners in order to exercise voting rights with respect to the shares represented by depositary receipts. The requirements for the provision of information are regulated by the Directive of the CBR dated June 15, 2015. Information about the depositary receipt owners is provided to the issuer in the form of a list of persons who exercise the rights under the depositary receipts. The list is provided to the issuer by the foreign depositary which opens the depo account of depositary programs. The list is provided for the preparation and holding of a shareholders’ meeting. See also “Item 3. Key Information — Risk Factors — Risks Relating to Our Shares and ADSs and the Trading Market — Upon introductionSome of a system of recording the depositary’s rights to theour shares underlying depositary receipts, the depositary is required to disclose information on ADS and GDS owners in order to exercise voting rights and receive dividends with respect to the shares underlyingare represented by ADSs and GDSs.GDSs, which may impede our ability to implement important business decisions.”
Furthermore, on July 1, 2016, provisions of the Federal Law No. 210 stipulating the new procedure for corporate actions became effective which,inter alia, provides for a possibility of participation at general meetings of security holders by means of electronic voting for those shareholders who hold their shares either directly on a share register or through a depositary. This new procedure may lead to delays in voting process and inconsistencies and may entail additional risks due to its novelty to the Russian market.
Board of Directors
The Joint-Stock Companies Law and our charter provide that our entire board of directors is up for election at each annual general shareholders’ meeting and that our board of directors is elected through cumulative voting. Under cumulative voting, each shareholder has a number of votes equal to the number of voting shares held by such shareholder multiplied by the number of persons to be elected to our board of directors, and the shareholder may give all such votes to one candidate or spread them between two or more candidates. Before the expiration of their term, the members of the board of directors may be removed as a group at any time without cause by a majority of the voting stock present at a general shareholders’ meeting.
The Joint-Stock Companies Law requires at least a nine-member board of directors for a joint-stock company with more than 10,000 holders of voting shares. Only natural persons (as opposed to legal entities) are entitled to sit on the board. Members of the board of directors are not required to be shareholders of the company. Members of the management board are not permitted to constitute more than 25% of the members of the board of directors. The actual number of directors is determined by the company’s charter or decision of the general shareholders’ meeting. Our charter provides that our board of directors shall consist of nine members, and the majority of our directors shall be independent.
The Joint-Stock Companies Law prohibits the board of directors from acting on issues that fall within the exclusive competence of the general shareholders’ meeting. Our board of directors has the power to direct the general management of the company, and to decide the following issues:
determination of our business priorities and their significant change, including approval of our annual and quarterly budgets;
convening of annual and extraordinary general shareholders’ meetings, except in certain circumstances specified in the Joint-Stock Companies Law;
approval of the agenda of the general shareholders’ meeting and determination of the record date for shareholders entitled to participate in a general shareholders’ meeting;
placement of our bonds and other securities;
repurchase of our shares, bonds and other securities in certain cases provided for by the Joint-Stock Companies Law;
appointment of the general director and members of the management board, and early termination of their powers and the establishment of their compensation;
recommendation to the general shareholders’ meeting on the amount of a dividend and the payment procedure thereof;
recommendation on the amount of remuneration and compensation to be paid to the members of our review commission and on the fees payable for the services of an independent auditor;
the use of our reserve fund and other funds;
the creation and liquidation of branches and representative offices;
approval of internal documents, except for those documents whose approval falls within the competence of the company’s shareholders or general director or the management board;
consent or subsequent approval of major and interested party transactions in the cases provided for by the Joint-Stock Companies Law;
approval of the procedures of internal control over financial and business operations of the company;
control over establishment of the risk management system;
increasing our charter capital by issuing additional shares within the limits of the authorized charter capital, except in certain circumstance specified in our charter;
approval of decisions on securities issuances and of the prospectus relating to such securities issuances, as well as of reports on the results of such securities issuances;
approval of our share registrar;
decision on filing of an application for listing of our shares or securities convertible into shares;
decision on alienation by the company of treasury and quasi-treasury shares, as well as determination of the procedure for alienation of such shares;
approval of financing transactions, as defined in our charter;
conclusion of transactions exceeding 5% of the balance sheet value of the company’s assets according to accounting statements on the last reporting date;
approval of our annual report and annual financial statements; and
other issues, as provided for by the Joint-Stock Companies Law and our charter.
Our charter requires a unanimous vote of the directors present for an action to pass, with the exception of actions for which our charter requires a majority vote of the directors or a majority vote of the disinterested and independent directors, as described herein. A board meeting is considered duly assembled and legally competent to act when the elected directors are present in a number necessary for the adoption of resolutions on items of the agenda in accordance with the charter. Quorum for a board meeting shall be at least half of the elected members of the board and certain issues require presence all of the elected members of the board, unless otherwise provided by the law or the company’s charter.
Management Board
In June 2011, an annual general shareholders’ meeting approved a new version of the “Bylaw on the Collegial Executive Body (Management Board).” Pursuant to the Bylaw, the management board engages in
discussions regarding important corporate issues within its powers and makes recommendations to our board of directors. The management board operates on the basis of our charter and applicable internal regulations. The management board’s size is defined by the board of directors, and it may comprise of senior management of Mechel and our subsidiaries, with each member of the management board elected by the board of directors for an indefinite period. A meeting of the management board is quorate if at least half of its members participate in the meeting.
The management board decides on the following issues, among others:
developing and submitting to the board of directors long-term plans for the implementation of the company’s priorities and proposals regarding its development strategy;
reporting to the board of directors on the realization of investment projects in the amount of more than $30 million;
developing and submitting to the board of directors investment projects in the amount of more than $50 million;
submitting to the board of directors proposals on bonds placement and acquisitions;
submitting to the board of directors proposals on participation (obtaining or increasing participation) or giving up (reducing) our participation in other entities;
approving annual and long-term investment programs;
approving transactions related to alienation by the company ofnon-current assets with a value of between 10% to 25% of the balance sheet value of the company’s assets, except for transactions provided by our charter and interested party transactions;
making certain decisions regarding the exercise of our rights as a shareholder or a participant of other entities;
making recommendations on certain matters relating to the management of our affiliates included in the list approved by our management board;
developing and establishing methods of compensation and monetary motivation for our employees; and
other issues related to ourday-to-day business referred to the management board by its chairman, the board of directors or by a shareholder holding not less than 10%20% of our voting shares.
Together with the general director, the management board is responsible for ourday-to-day management and administration. The management board’s activities are coordinated by the general director (chairman of the management board) and are regulated by applicable Russian law and our charter.
General Director
The general director (also referred to in this document as chief executive officer) is our sole executive body and manages our current operations within its powers and organizes the implementation of resolutions of our general shareholders’ meeting and the board of directors. The general director acts on our behalf without a power of attorney and has the following rights and responsibilities:
performing the routine management of our operations;
exercising the right of first signature on financial documents;
managing our property to provide for our current operations within the limits established by our charter and prevailing Russian legislation within its powers;
representing our interests both in Russia and abroad;
entering into transactions on our behalf within its powers;
issuing powers of attorney on our behalf;
opening and closing our bank accounts;
organizing our accounting and reporting process;
issuing orders and instructions binding on all our employees;
organizing the implementation of resolutions of our general shareholders’ meeting and our board of directors; and
performing other functions necessary to achieve our aims and to provide for our normal operations, in compliance with prevailing legislation and our charter, except for the functions laid upon our other management bodies by the Joint-Stock Companies Law and our charter.
The general director is appointed by the board of directors for a period of one year. The term of office runs from the time of his appointment until such time as a general director is appointed by the board of directors one year later. The general director may bere-appointed an unlimited number of times.
The general director may on his own initiative renounce his powers at any time by written notice to the board of directors. The authority of the general director may be terminated before the expiration of his term of office by a resolution of the board of directors on the following grounds:
failure to comply with the requirements of our charter, resolutions of the general shareholders’ meeting or the board of directors or our internal documents;
in the cases stipulated by the employment agreement with the general director; and
in other events provided by current legislation.
Upon resolution of the general shareholders’ meeting, the authority of the sole executive body may be vested in a commercial organization (a “managing organization”) or an individual entrepreneur (a “manager”) on a contractual basis. Under the Civil Code, if the authority of a company’s sole executive body has been vested in a managing organization or a manager, the company exercises its legal rights and assumes its legal obligations through such managing organization or manager. A resolution to transfer the authority of a company’s sole executive body to a managing organization or a manager shall be passed by the general meeting of shareholders only upon recommendation of the board of directors of the company.
Our general director is required under Russian law to disclose information on his holdings of our securities and on sales and/or purchases of our securities, as well as if he is a member of the Board of Directors to inform of the circumstances by virtue of which he can be recognized interested in transactions.
Role of the Review Commission
The review commission exercises control over our financial and business operations.
On the basis of the results of its examination of our financial and business operations, the review commission prepares opinions, which contain the following:
Upon a request from the review commission, the general director and members of the board of directors, the management board and the liquidation commission must undertake to make available documents pertaining to our financial and business operations. The review commission is entitled to request that an extraordinary general shareholders’ meeting be convened in accordance with the procedure provided by our charter.
The review commission is elected by our general shareholders’ meeting for a period of one year and consists of three persons. Shares owned by members of our board of directors or persons holding positions in our management bodies cannot participate in the voting, when members of the review commission are elected. The term of office of the review commission runs from the moment it is elected at the annual general shareholders’ meeting to the moment it is elected orre-elected at the next annual general shareholders’ meeting. The authority of individual members or the whole review commission may be terminated before the expiration of the term of office thereof by a resolution of the general shareholders’ meeting on the grounds and in compliance with the procedure stipulated by our internal documents. If the number of members of the review commission falls to less than half of the membership thereof, the board of directors must convene an extraordinary general shareholders’ meeting to elect a new review commission. The remaining members of the review commission continue to perform their functions until a new review commission is elected.
A shareholder or any person proposed by a shareholder may become a member of the review commission. A member of the review commission cannot simultaneously be a member of the board of directors, a member of the liquidation commission, the general director or a member of the management board. The review commission elects its chairman and secretary from within its members.
The general shareholders’ meeting determines remuneration and compensation of expenses to the members of the review commission.
Interested Party Transactions
In accordance with amendments to the Joint-Stock Companies Law, which entered into force on January 1, 2017, transactions defined as “interested party transactions” do not require a mandatory prior consent of disinterested directors or shareholders of a company. However, the Joint-Stock Companies Law introduces an obligation of the company to notify members of the board of directors, members of the collegial executive body
and in case all members of the board of directors are interested (or in case such notification is prescribed by the charter) all shareholders about such transactions prior to their accomplishment. After receiving such a notice, the above-mentioned persons may demand convocation of a meeting of the board of directors or a general shareholders’ meeting to obtain relevant consent.
The following persons may be deemed interested parties: a member of the board of directors; the sole executive body; a member of a collegial executive body; a person directly or indirectly controlling over 50% of the voting shares in another legal entity (on the basis of an instruction, a shareholders’ agreement or other agreements); a person having the right to appoint the sole executive body or more than half of the management board members; and a person having the right to give binding instructions on the company.
A person directly or indirectly holding over 50% of the voting shares in another legal entity shall be deemed controlling. A person in which such holding is exercised shall be deemed controlled.
A transaction shall be deemed an interested party transaction if the persons referred to above and/or their spouses, parents, children, adoptive parents and adopted children, full and half brothers and sisters and/or controlled entities:
act as parties to, beneficiaries in, representatives or agents in the transaction;
control another legal entity that is a party, beneficiary, representative or agent in the transaction; or
In public joint-stock companies approval for the transaction shall be granted by a majority vote of disinterested directors of the company who within one year prior to the decision: (1) have not acted as general directors (or persons performing functions of the sole executive body), members of any executive body of the company or its management company or managers; (2) did not have spouses, parents, children, adoptive parents and adopted children, full and half brothers and sisters acting as members of any executive body of the company or its management company or managers; and (3) did not control the company or its management and were not entitled to give instructions binding on the company.
If the value of a transaction or a number of related transactions is 10% or more of the balance sheet value of the company’s assets calculated in accordance with the Russian accounting standards, as well as in other cases provided by the Joint-Stock Companies Law, the approval for such transactiontransactions shall be granted by a majority vote of disinterested shareholders holding voting shares, participating in the meeting.meeting, and not (i) interested in the transaction or (ii) controlled by persons interested in the transaction.
At the same time, the Joint-Stock Companies Law provides cases in which the relevant requirements do not apply. These include transactions entered into within the ordinary course of business (even if the company did not enter into similar transactions before), transactions in respect of property with the value not exceeding 0.1% of the balance sheet value of the company’s assets calculated in accordance with the Russian accounting standards as of the last reporting date, or transactions on the acquisition or redemption by the company of its issued shares, as well as in other cases provided by the Joint-Stock Companies Law.
For information on certain risks relating to interested party transactions see “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — In the event that the minority shareholders of our subsidiaries were to successfully challenge past interested party transactions or do not approve interested party transactions in the future, we could be limited in our operational flexibility.”
Major Transactions
The Joint-Stock Companies Law defines a “major transaction” as a transaction or a number of related transactions entered into beyond the ordinary course of business and, at the same time, associated with the direct
or indirect acquisition, disposal or possibility of disposal of property with a value of 25% or more of the balance sheet value of the company’s assets determined in accordance with the Russian accounting standards as of the last reporting date preceding the transaction, as well as in other cases provided by the Joint-Stock Companies Law.
Under the Joint-Stock Companies Law a decision to issue consent to, or to grant a subsequent approval of, major transactions shall be adopted in accordance with the following procedure:
major transactions involving property ranging from 25% to 50% of the balance sheet value of the company’s assets require unanimous approval by all members of the board of directors or, if unanimity is not reached, a majority of the voting stock held by shareholders participating in the meeting; and
major transactions involving property in excess of 50% of the balance sheet value of the company’s assets require a three-quarters majority of the voting stock held by shareholders participating in the meeting.
At the same time, the Joint-Stock Companies Law sets out the cases to which requirements to the procedure of executing of major transactions do not apply:
transactions related to the placement of shares or other securities convertible into shares;
transactions mandatory for companies pursuant to the federal laws (settlements under such transactions are effected at fixed prices and tariffs set by the relevant governmental authorities); and
other cases provided by the Joint-Stock Companies Law.
For information on our largest shareholders’ potential ability to approve major transactions see “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — The concentration of our shares with our largest shareholders will limit your ability to influence corporate matters and transactions with largest shareholders may present conflicts of interest, potentially resulting in the conclusion ofentering into transactions on less favorable terms than could be obtained inon arm’s length transactions.basis.”
Change in Control
Anti-takeover protection
Russian legislation requires the following:
A person intending to acquire more than 30% of the total number of a public company’s common shares and voting preferred shares (including, for such purposes, shares already owned by such person and its affiliates), will be entitled to make a public offer to other holders of the corresponding categories (types) of shares of the public company (the “voluntary offer”). The voluntary offer may also contain an offer to purchase securities convertible into such shares from other holders of such securities convertible into such shares of the public company.
A person that has acquired more than 30% of the total number of a public company’s common shares and voting preferred shares (including, for such purposes, shares already owned by such person and its affiliates) will be required to make, within 35 days of such shares being recorded in the name of such person or the moment when the person learnt, or should have learnt that it individually or together with its affiliates owned the relevant number of the shares, a public offer for other shares of the same class and for securities convertible into such shares (the “mandatory offer”), at a price which is not less than (i) the price determined based on a weighted average market price of the shares and securities convertible into such shares during trading sessions on a stock exchange for the six months preceding the date when a mandatory offer was sent to the CBR; or (ii) the market price, which must be determined by an appraiser if the shares and securities convertible into such shares are not traded on a stock exchange or their trading history is less than six month. The public offer price may not be less than the highest price at which the offeror or its affiliates purchased or undertook to purchase the relevant shares or securities over thesix-month period before the offer was sent to the public company. From the moment of acquisition of more than 30% of the total number of the shares until the moment of sending of an offer to the public company, the person making the offer and its affiliates will be able to vote only 30% of the common shares and voting preferred shares of the public company (regardless of the size of their actual holdings). These rules are also applied (or reapplied) to acquisitions resulting in a person and its affiliates owning more than 50% and 75% of a public company’s outstanding common shares and voting preferred shares.
determined by an appraiser if the shares and securities convertible into such shares are not traded on a stock exchange or their trading history is less than six month. The public offer price may not be less than the highest price at which the offeror or its affiliates purchased or undertook to purchase the relevant shares or securities over thesix-month period before the offer was sent to the public company. From the moment of acquisition of more than 30% of the total number of the shares until the moment of sending of an offer to the public company, the person making the offer and its affiliates will be able to vote only 30% of the common shares and voting preferred shares of the public company (regardless of the size of their actual holdings). These rules are also applied (or reapplied) to acquisitions resulting in a person and its affiliates owning more than 50% and 75% of a public company’s outstanding common shares and voting preferred shares. |
A person that, as a result of such a voluntary or mandatory offer, becomes (individually or together with its affiliates) the owner of more than 95% of the total number of the public company’s common shares and voting preferred shares, must buy out the remaining shares of the public company as well as other securities convertible into such shares upon request of the holders of such shares or other securities, and may require such holders to sell such shares and other securities convertible into such shares. The price for the shares and other securities convertible into such shares should be determined in the manner described above for a mandatory offer, but it may not be less than (i) the price of the preceding acquisition of the public company’s shares or other securities convertible into such shares under the voluntary or mandatory offer as a result of which the offeror and its affiliates acquired over 95% of the total number of the public company’s common shares and voting preferred shares; or (ii) the highest price at which after the expiration date of the voluntary or mandatory offer the offeror or its affiliates acquired or undertook to acquire such shares or other securities convertible into such shares of the public company. The offeror is entitled to require the holders of the remaining shares of the public company, as well as other securities convertible into such shares, to sell such shares and other securities, provided that the offeror acquired not less than 10% of the total number of shares or other securities of the public company as a result of acceptance by other shareholders of the voluntary or mandatory offer as described above.
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An offer of the kind described in the preceding three paragraphs must be accompanied by a bank guarantee of payment. Prior notice of the offer must be filed with the CBR which may order amendments to the terms of the offer (including price) in order to bring them into compliance with the requirements of the current legislation.
| • | Once a voluntary or mandatory offer has been made, competing offers for the same securities can be made by third parties and, in certain circumstances, acceptance of the initial offer may be withdrawn by the security holders who choose to accept such competing offer. From the date of receipt of a voluntary or mandatory offer by the public company until 20 days after its expiration the public company’s general shareholders’ meeting will have the sole power to make decisions on charter capital increase by way of issuance of additional shares within the number and category (type) of authorized shares, issuance of securities convertible into shares, including options of a public company, consent or subsequent approval of certain transactions or a number of related transactions, involving the acquisition or disposal, or a possibility of disposal (whether directly or indirectly), of property having a value of 10% or more of the balance sheet value of the assets of a public company as determined under the Russian accounting standards as of the last reporting date preceding the transaction, with the exception of,inter alia, transactions completed in the ordinary course of business, and on certain other significant matters. |
The above rules may be supplemented through rulemaking by the CBR, which may result in a broader, narrower or more specific interpretation of these rules by the governmental and judicial authorities, as well as by market participants.
Approval of the Russian Federal Antimonopoly Service
Pursuant to the Competition Law, acquisitions of voting shares of a joint-stock company, involving companies with a combined value of assets or annual revenues, exceeding a certain threshold under the Russian accounting standards, which would result in a shareholder (or a group of shareholders defined under Russian law) holding more than 25%, 50% or 75% of the voting capital stock of such company, or in a transfer between such companies of assets or rights to assets, the value of which exceeds a certain amount, or obtaining rights to determine the conditions of business activity of an entity or to exercise the authorities of its executive body must be approved in advance by the FAS. Such transactions executed between members of a group of companies may require only a subsequent notification to the FAS if prior notification about the members of the group of companies has been filed with the FAS and the information contained in this notification is still accurate as of the date of the relevant transaction and had not been changed within 30 days from the date of group’s disclosure and prior to the date of the transaction’s settlement. See “Item 4. Information on the Company — Regulatory Matters — Russian Antimonopoly Regulation.”
Foreign ownership
Under the Strategic Industries Law any acquisition, whether direct or indirect, by a foreign investor or its group of entities (except for the acquisition by a foreign investor controlled by the Russian Federation, the constituent entity of the Russian Federation and/or Russian nationals provided such Russian nationals are Russian tax residents and do not have other nationality) of a certain stake, or certain rights, in a Strategic
Company or a Subsoil Strategic Company, as well as acquisition, ownership or use by them of property of such companies which relates to core production facilities and the cost of which is 25% or more of the balance sheet value, must be previously approved by the Governmental Commission. Under the Strategic Industries Law, acquisition of 5% or more of the charter capital of a Strategic Company and implementation ofpre-agreed transactions and other actions by a foreign investor or its group of entities require notification of the Russian authorities. The FAS is the federal executive authority for execution of control over making foreign investments in the Russian Federation. See “Item 3. Key Information — Risk Factors — Legal risks and uncertainties — Expansion of limitations on foreign investment in strategic sectors could affect our ability to attract and/or retain foreign investments” and “Item 4. Information on the Company — Regulatory Matters — The Strategic Industries Law.”
The Federal LawNo. 160-FZ “On Foreign Investments in the Russian Federation,” dated July 9, 1999, as amended (“Foreign Investments Law”), provides that any acquisition (whether direct or indirect) by a foreign state or international organization or entities controlled by them of more than 25% of voting shares in a Russian company or any other powers to block decisions of the management bodies in a Russian company, requires a prior approval of the Governmental Commission in accordance with the procedures set forth in the Strategic Industries Law.
In July 2017, the Foreign Investments Law and the Strategic Industries Law were amended to restrict foreign investments. After July 18, 2017, any transaction involving acquisition of rights by a foreign investor in respect of any Russian enterprise may become subject to approval by the Commission on Control of Foreign Investments in Russia at the decision of the Russian Prime Minister.its Chairman. Furthermore, the notion of a foreign investor also includes Russian citizens possessing foreign nationality and legal entities which, though incorporated in Russia, are controlled by foreign investors. The amendments to the Strategic Industries Law which entered into force on July 1, 2017 alsoJune 12, 2018, prohibit obtaining control over “strategic” enterprisesa Strategic Company or entering into transactions involving more than 25% of theiracquiring fixed assets of a Strategic Company representing 25% or more of its balance sheet value to companies incorporated in a countryforeign investors which do not submit to the FAS information on their beneficiaries, beneficial owners and controlling parties, or territory included in the Ministry of Finance Register of Territories with Favorable Taxation System (“offshore companies”) or entitiesorganizations controlled by them.
Disclosure of Ownership
Under Russian law, a holder of common shares of a joint-stock company, which has a CBR registered prospectus, must notify the company and the CBR of an acquisition of 5% or more of the company’s common
shares or of an acquisition of the right to cast votes attached to 5% or more of the common shares by virtue of an agreement or otherwise, and of any subsequent change in the number of the common shares above or below a 5%, 10%, 15%, 20%, 25%, 30%, 50%, 75% or 95% threshold. Such notifications must be given not later than 10 days after the common shares have been transferred to such shareholder’s securities account or after the acquisition of the right to cast votes attached to such common shares, whether by virtue of an agreement or otherwise.
Russian taxpayers (organizations and individual entrepreneurs), as well as foreign persons, registered as individual entrepreneurs in Russia, who acquire more than 10% of shares in a Russian joint-stock company, need to notify the Russian tax authorities within one month following such acquisition.
Negative Net Assets
If the net assets of a Russian joint-stock company calculated on the basis of the Russian accounting standards as of the end of its second or any subsequent reporting year are lower than its share capital, the joint-stock company’s board of directors must disclose it in the annual report. Furthermore, if the net assets of a Russian joint-stock company calculated on the basis of the Russian accounting standards as of the end of the reporting year that follows its second or any subsequent reporting year, at the end of which the net assets of such company were lower than its share capital, remain lower than its share capital, the company must decrease its
share capital to the amount of its net assets or liquidate. In addition, if a Russian joint-stock company’s net assets calculated on the basis of the Russian accounting standards as of the end of its second or any subsequent reporting year are lower than the minimum amount of the share capital required by law, the company must liquidate.
Moreover, if a Russian joint-stock company fails to comply with any of the requirements stated above within six months from the end of the relevant reporting year, governmental or local authorities will be able to seek involuntary liquidation of such company in court. In addition, if a Russian joint-stock company fails to comply with any of the requirements stated above within six months from the end of the relevant reporting year or decreases its share capital, the company’s creditors will have the right to accelerate their claims or demand early performance of the company’s obligations owed to them and demand compensation of damages.
In addition, if a Russian joint-stock company’s net assets calculated on the basis of the Russian accounting standards are lower than its share capital by more than 25% as of the end of three, six, nine or twelve months of the reporting year that follows its second or any subsequent reporting year, at the end of which the net assets of such company were lower than its share capital, a joint-stock company is obliged to make a public disclosure of this fact. In this case, the company’s creditors whose claims arose before the publication will have the right to accelerate their claims or demand early performance of the company’s obligations owed to them and demand compensation of damages.
However, if a Russian joint-stock company is able to demonstrate that the creditors’ rights were not violated as a result of a decrease of its share capital or a decrease of the amount of its net assets, as the case may be, and that the security provided for due performance of the company’s obligations is sufficient, a court may dismiss the creditors’ claims that are brought in the following cases: (1) in the event of a decrease of the share capital of the company, including when the share capital of the company must be decreased to the amount of its net assets in compliance with the requirements of Russian law; and (2) in the event the company’s net assets calculated on the basis of the Russian accounting standards are lower than its share capital by more than 25% at the end of three, six, nine or twelve months of the reporting year that followed its second or any subsequent reporting year, at the end of which the net assets of such company became lower than its share capital. Moreover, the existence of negative assets, generally, may not accurately reflect the actual ability to pay debts as they come due. Some Russian courts, in deciding whether or not to order the liquidation of a company for having negative net assets, have looked beyond the fact that the company failed to comply fully with all applicable legal requirements and have taken into account other factors, such as the financial standing of the company and its ability to meet its tax
obligations, as well as the economic and social consequences of its liquidation. Nonetheless, creditors have the right to accelerate claims, including damages claims, and governmental or local authorities may seek the liquidation of a company with negative net assets. Courts have, on rare occasions, ordered the involuntary liquidation of a company for having net assets less than the minimum share capital required by law, even if the company had continued to fulfill its obligations and had net assets in excess of the minimum share capital required by law at the time of liquidation. See “Item 3. Key information — Risk Factors — Legal risks and uncertainties — One or more of our subsidiaries could be forced into liquidation on the basis of formalnon-compliance with certain requirements of Russian law, which could materially adversely affect our business, financial condition, results of operations and prospects.”
Material Contracts
The following is a description of contracts that we and/or our subsidiaries are a party to and that are or may be material to our business. The descriptions of the contracts are qualified in their entirety by reference to the relevant contracts. For more information, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Restrictive Covenants,”Covenants” and “Item 13. Defaults, Dividend Arrearages and Delinquencies” and “Item 8. Financial Information — Litigation — Debt litigation.Delinquencies.”
Credit Facility for Mechel from VTB Bank
General
On December 27, 2010, Mechel obtained a credit line for the total amount of 10.0 billion rubles (approximately $329.3 million) from VTB Bank to finance our general activity. In November 2011, the amount of the credit line was increased up to 13.0 billion rubles (approximately $442.2 million).rubles.
On April 10, 2013, Mechel executed an amendment increasing the amount of the facility to 40.0 billion rubles (approximately $1.3 billion as of that date). The term of the facility was extended to five years and the covenants were amended. The proceeds were used to refinance existing indebtedness with VTB Bank as well as to refinance other obligations of the companies within our group (including redemption of ruble bonds).
In May 2014, Mechel entered into an amendment to the credit facility agreement to refinance debt in the amount of 40.0 billion rubles (approximately $711.0 million as of December 31, 2014), providing for an extension of the repayment grace period until April 2015 and the final maturity until April 2018. VTB Bank also provided an additional loan for redemption of ruble bonds in the amount of up to 3.8 billion rubles (approximately $67.3 million as of December 31, 2014). As of December 31, 2014, the facility was fully drawn.
In September 2015, Mechel signed restructuring with VTB Bank for the amount of principal and accrued compounded interest totaling 44.8 billion rubles (approximately $614.3 million as of December 31, 2015), providing for an extension of the repayment grace period until April 2017 and the final maturity until April 2020. The restructuring came into effect on October 13, 2015.
In December 2016, Mechel signed an amendment to its credit facility agreement with VTB Bank which provides for an extension of the repayment grace period until April 2020 and the final maturity until April 2022.
In December 2016, Chelyabinsk Metallurgical Plant entered into a credit facility agreement with VTB Bank with a credit limit of 30.0 billion rubles (approximately $494.6 million as of December 31, 2016) to refinance Mechel’s debt under the credit facility with VTB Bank. The loans are provided to the borrower until February 28, 2020 in the amount of 5.0 billion rubles twice a year in 2017 and 2018 and once a year in 2019 and 2020. The borrower’s obligations are guaranteed by Mechel and the same guarantors as under the Mechel’s credit facility, except for Bratsk Ferroalloy Plant, Mecheltrans and Mechel Service. The credit facility is secured by the same pledges as the Mechel’s credit facility, except for 37.5%+1 share of Mechel Mining. In all other material aspects the terms of the credit facility are identical to the Mechel’s credit facility. As of December 31, 2019, we had drawn 15.0 billion rubles under this credit facility. In February 2020, we drew down another 5.0 billion rubles.
Interest rate and interest period
Interest under the credit facility is payable monthly at the CBR key rate plus 1.5% per year. The lender may increase the interest rate by 1% per year if the borrower fails to meet certain obligations under the credit facility.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: 8.75% if our Net Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Net Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Net Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Net Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full.
If the CBR key rate plus 1.5% per year is less than payable interest rate, we apply the CBR key rate plus 1.5% per year for interest repayment.
Repayment and prepayments
The facility has a grace period until April 6, 2020 and is to be repaid in equal monthly installments. The final maturity date is April 6, 2022. Mechel may prepay the loan in full or in part subject to simultaneous compliance with certain requirements.
Guarantee
The borrower’s obligations under the credit facility are guaranteed by Mechel Mining, Mechel Carbon, Mechel Carbon Singapore, Mechel Trading, Yakutugol, Southern Kuzbass Coal Company, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Bratsk Ferroalloy Plant, Mecheltrans and Mechel Service.
Security
The credit facility is secured by a pledge of 37.5%+1 share of Mechel Mining,46.66%-1 share of Chelyabinsk Metallurgical Plant, 25%50%-2 shares of Yakutugol, 50%+1 share2 shares of Southern Kuzbass Coal Company,25%-3 shares of Yakutugol, 25%+1 share of Korshunov Mining Plant and 25%+1 share of Urals Stampings Plant.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with financial and certainnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of Net Borrowings to EBITDA shall not exceed 8.00:1 until December 31, 2017, 7.00:1 until December 31, 2018, 6.00:1 until December 31, 2019, 5.00:1 until December 31, 2020 and thereafter. Mechel group’s ratio of EBITDA to Net Interest Expense shall not be less than 1.50:1 until December 31, 2017, 1.75:1 until December 31, 2018, 2.00:1 until December 31, 2019, 2.25:1 until December 31, 2020 and thereafter. Financial covenants are tested semi-annually.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults relating to other debt, as well as limitations on payment of dividends, acquisitions and disposals andnon-core transactions.
The credit facility agreement is governed by Russian law.
Credit Facilities for Southern Kuzbass Coal Company from SberbankVTB Bank (previously Sberbank)
General
On October 9, 2012, Sberbank opened four credit lines to our subsidiary Southern Kuzbass Coal Company in the total amount of 24.0 billion rubles (approximately $772.3 million) for the purpose of working capital financing. As of December 31, 2012, we had drawn 15.1 billion rubles (approximately $497.2 million) under the credit lines. In February 2013, we drew down an additional 1.0 billion rubles. Due to the amendment in March 2013, we drew down a further 7.9 billion rubles (such drawdowns also contained abuilt-in cross-currency derivative instrument). As of December 31, 2013,
the facilities were fully drawn. In December 2014, due to substantial depreciation of the ruble, the exchange rate threshold of 50.00 rubles per one U.S. dollar (as stipulated in the agreements) was exceeded and Sberbank converted the 20.9 billion rubles loans into U.S. dollars. As of December 31, 2015, the outstanding balance was $678.0 million for the U.S. dollar-denominated part of the credit lines and 3.1 billion rubles for the ruble-denominated part of the credit lines.
In December 2015, Southern Kuzbass Coal Company signed settlement agreements with Sberbank making all the debt due and payable to be further assigned to Gazprombank in the amount of 31.5 billion rubles. In April 2016, Southern Kuzbass Coal Company signed new settlement agreements with Sberbank which assigned part of the principal amount to Gazprombank. The principal in the total amount of $423.1 million (28.4 billion rubles as of April 12, 2016) and 3.1 billion rubles was assigned with $254.9 million remaining with Southern Kuzbass Coal Company. The overdue interest on ruble-denominated and U.S. dollar-denominated debt was added to the principal outstanding in the amount of 189.4 million rubles and $40.2 million, respectively. Part of the overdue interest and penalties remained with Southern Kuzbass Coal Company was capitalized with extended maturity similar to the principal outstanding. The rest of the overdue interest and penalties were paid in June 2016.
In November 2019, Sberbank assigned the credit facilities, including related security, to VTB Bank. The terms and conditions of the facility agreements remained unchanged.
Interest rate and interest period
Under the U.S. dollar-denominated part of the credit lines, the interest is payable monthly at 3M LIBOR plus a margin of 7% per year. During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: 3M LIBOR+5% if our Total Borrowings/EBITDA ratio is above 6.01; 3M LIBOR+5.5% if our Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and 3M LIBOR+6% if our Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full.
Under the ruble-denominated part of the credit lines, the interest is payable monthly at the CBR key rate plus 1.5% per year. The lender may change the interest rate to the CBR key rate plus 3.5% per year if our Total Borrowings/EBITDA ratio is 4.00 or less. During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interest is being capitalized and paid on the final maturity date. Payable interest rate: (key rate +1.5%)×0.6 if our Total Borrowings/EBITDA ratio is above 6.01; (key rate +1.5%)×0.7 if our Total Borrowings/EBITDA ratio is above 5.01 and equal to or less than 6.01; and (key rate +1.5%)×0.8 if our Total Borrowings/EBITDA ratio is above 4.01 and equal to or less than 5.01. If our Total Borrowings/EBITDA ratio is 4.01 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not be less than 8.75% per year.
Repayment and prepayments
The final maturity date is April 10, 2022. The debt is payable in equal monthly installments starting from January 10, 2020. The borrower may prepay the loans in full or in part with prior notice to the lender.
Guarantee
The borrower’s obligations under the credit facility agreements are guaranteed by Mechel, Mecheltrans, Mechel Service, Bratsk Ferroalloy Plant, Izhstal, Yakutugol, Korshunov Mining Plant, Chelyabinsk Metallurgical Plant and Mechel Mining.
Security
Starting from March 2016, the credit facilities share one security package with other Sberbank (now VTB Bank) credit facilities: a pledge of 25%+1 share of Mechel Mining, a pledge of 25%+1 share of Beloretsk Metallurgical Plant, pledges of movable assets and mortgage over immovable assets of other Sberbank borrowers within Mechel group.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with certain financial and certainnon-financial covenants.
Under the credit facility agreements, Mechel group’s ratio of Total Borrowings to EBITDA shall not exceed 5.5:1 as of December 31, 2017, 4.5:1 as of June 30, 2018 and December 31, 2018, 3.5:1 as of June 30, 2019 and December 31, 2019, 3.0:1 as of June 30, 2020 and thereafter. Mechel group’s ratio of EBITDA to Consolidated Financial Expense shall not fall below 1.5:1 as of December 31, 2017, 1.75:1 as of June 30, 2018 and December 31, 2018, 2.0:1 as of June 30, 2019 and December 31, 2019, 2.5:1 as of June 30, 2020 and thereafter.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreements are governed by Russian law.
Pre-Export Facility Agreements
General
On December 3, 2013, our subsidiaries Yakutugol and Southern Kuzbass Coal Company entered into amendment agreements to the existing $1.0 billionpre-export facility agreements (as amended and restated on December 4, 2012) with a syndicate of banks coordinated by ING Bank N.V., Société Générale and VTB Capital Plc. The amendments provide that the loan, which was entering the repayment phase in December 2013, is to be repaid in equal monthly installments until December 2016 following a grace period of 12 months ending in December 2014. The terms of the facility agreements are identical in all material aspects, except for the security provided under each facility. In December 2016, the final maturity under the facility agreements expired making all the debt due and we failed to repay it.
As of December 31, 2017, we had overdue principal in the amount of $1.0 billion (approximately 57.8 billion rubles) and overdue interest, including default interest, in the amount of $194.4 million (approximately 11.2 billion rubles) under these facility agreements. We have requested the banks to restructure the repayment schedule of the facilities in 2015 but so far no agreement has been reached. In February 2017, a number of lenders filed 14 requests for arbitration with the LCIA. See “Item 8. Financial Information — Litigation — Debt litigation.” In December 2017, we entered into alock-up agreement with a majority of lenders in order to facilitate the restructuring.
Interest rate and interest period
Interest under the facilities is payable at 1M LIBOR plus a margin, or at a fixed rate that may be agreed with the lenders. Based on results for the period ending on December 31, 2012, the margin levels were reset during 2013 at 5.5% per year. The overdue principal bears interest rate of 1M LIBOR plus 7.5% per year.
Repayment and prepayments
The facility is repayable in equal monthly installments after a12-month grace period ending in December 2014. The borrowers are entitled to prepay the loan subject to 10 business days’ prior notice to the syndicate of banks and certain other conditions specified in the credit facility agreements. Starting from December 2014, the borrowers have failed to pay the installments. In December 2016, the facility has matured without being repaid.
Guarantee
Yakutugol’s obligations under the credit facility agreement are guaranteed in full by Mechel, Mechel Mining, Mechel Carbon, Mechel Carbon Singapore as well as by Southern Kuzbass Coal Company and Korshunov Mining Plant (for Southern Kuzbass Coal Company and Korshunov Mining Plant in the amount of up to 2% of the value of their total assets as determined under the Russian accounting standards).
Southern Kuzbass Coal Company’s obligations under the credit facility agreement are guaranteed in full by Mechel, Mechel Mining, Mechel Carbon, Mechel Carbon Singapore and Yakutugol, as well as by Korshunov Mining Plant (for the latter in the amount of up to 2% of the value of its total assets as determined under the Russian accounting standards).
Security
Yakutugol’s obligations under the credit facility agreement are secured by a pledge of all equipment and machinery of the borrower having a balance sheet value of $10.0 million or higher and a pledge of 15%+1 share of Yakutugol and of 10% of shares of Southern Kuzbass Coal Company.
Southern Kuzbass Coal Company’s obligations under the credit facility agreement are secured by a pledge of all equipment and machinery of the borrower having a balance sheet value of $10.0 million or higher and a pledge of 15%+1 share of Southern Kuzbass Coal Company and of 10% of shares of Yakutugol.
The obligations of each of the borrowers are also secured by the assignment of rights under their export and offtake contracts and a charge over their collection accounts.
Covenants and other matters
Although the credit facilities matured in December 2016, they have not been repaid or restructured, thus the new set ofnon-financial covenants as well as the new ratios of financial covenants for the future periods were not agreed and implemented into the documentation.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, including negative pledges and limitation on lending to third parties, as well as notice provisions and events of default, including change of control and cross-defaults relating to other debt with certain limitations.
The credit facility agreements are governed by English law.
Facility Agreement for Chelyabinsk Metallurgical Plant from BNP Paribas, Gazprombank and UniCredit — Universal Rolling Mill Facility Agreement
General
On September 15, 2010, we signed a credit facility agreement to finance the universal rolling mill installation project at our subsidiary Chelyabinsk Metallurgical Plant. The credit facility consists of three tranches underwritten by BNP Paribas S.A., Gazprombank and UniCredit. Gazprombank’s tranche is $219.4 million, BNP Paribas’s tranche is €102.8 million and UniCredit’s tranche is €89.2 million. The credit facility benefits from insurance coverage of the Italian, German and Chinese export credit agencies: SACE, Euler Hermes and Sinosure, respectively.
The purpose of the facility is to finance payments under two contracts: the equipment and technology supply contract executed with Danieli and the general construction contract executed with Minmetals.
As of December 31, 2017,2019, the principal amount outstanding under the facility was $154.9 million and €154.7 million (in aggregate approximately 19.620.3 billion rubles), with overdue principal in the amount of $98.6$154.9 million and €77.3€121.5 million (in aggregate approximately 11.018.0 billion rubles) and overdue interest in the amount of $14.5$8.9 million and €3.3€2.1 million (in aggregate approximately 1.10.7 billion rubles). We hold negotiations with the lenders on the restructuring of the facility.
Interest rate and interest period
Interest on the facility tranche underwritten by Gazprombank (Facility A) is payable at 6M LIBOR plus a margin of 6.75% per year during the period until the construction completion date and at 6M LIBOR plus a margin of 6.25% per year after that date. Interest on the facility tranche underwritten by UniCredit (Facility B) is payable at 6M EURIBOR plus a margin of 1.50% per year. Interest on the facility tranche underwritten by BNP Paribas (Facility C) is payable at 6M EURIBOR plus a margin of 1.60% per year. The margin is increased by 2% per year if the payments are overdue.
Accrued interest is payable twice a year on payment dates January 21 and July 21.
Repayment and prepayments
The borrower must repay the tranches in 13 equal semi-annual installments in respect of Facility A; 16 equal semi-annual installments in respect of Facility B; and 16 equal semi-annual installments in respect of Facility C.
Repayment starts on the first repayment date, which means in respect of each of the tranches, the first payment date (January 21 or July 21) falling after the earlier of (a) the end of the availability period and (b) the construction completion date. The availability period under all three tranches is 30 months from the signing date. Facility A must be repaid in full after six years following the first repayment date, Facilities B and C must be repaid in full after seven and a half years following the first repayment date. On July 22, 2019, Facility A has matured without being repaid.
The borrower may make a pro rata prepayment of the loan with the prior written consent of the lenders. A prepayment of part of the loan must be of a minimum amount of $10.0 million in respect of Facility A, and €10.0 million in respect of Facility B and Facility C.
Starting from July 2014, the borrower failed to pay the installments.
Guarantee
The borrower’s obligations under the credit facility agreement are guaranteed by Mechel.
Security
The borrower’s obligations under the credit facility agreement are secured by a pledge of 20% of shares of Chelyabinsk Metallurgical Plant. The borrower has also granted security over certain of its assets, including real estate and equipment to secure its obligations.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with certain financial andnon-financial covenants.
Under the credit facility agreement, Mechel’s ratio of Net Borrowings to EBITDA shall not exceed 5.8:3.25:1 as of December 31, 2017June 30, 2015 and thereafter, provided that if during any period the ratio of Net Borrowings to EBITDA is 3.0:1 or less, then the ratio of 3.0:1 continues to apply thereafter. Mechel’s ratio of EBITDA to Net Interest Expense shall not fall below 2.0:4.0:1 as of December 31, 2017June 30, 2014 and thereafter. Mechel’s shareholder equity shall be equal to or exceed $3.0 billion.
Mechel may pay dividends: (i) on our common and preferred shares, provided that the ratio of Mechel’s Net Borrowings to EBITDA does not exceed 3.0:1, and if such dividends are funded from available excess cash flow, provided that no default occurs or would occur as a result of that payment; and (ii) if dividends on our preferred shares do not exceed 20% of Mechel’s net profit. If Mechel records a loss as shown in the financial statements, the amount of permitted dividends paid on our preferred shares shall be limited to 7.5 million rubles for any such financial year.
Acquisitions by members of our group are permitted if (1) such acquisitions in aggregate do not exceed (i) $5.0 million when the ratio of our Net Borrowings to EBITDA exceeds 3.5:1, (ii) $50.0 million when the ratio of our Net Borrowings to EBITDA is within the range of 3.0:1 – 3.5:1, (iii) $250.0 million when the ratio of our Net Borrowings to EBITDA is within the range of 2.5:1 – 3.0:1, (iv) $375.0 million when the ratio of our Net Borrowings to EBITDA is within the range of 2.0:1 – 2.5:1, or (v) $500.0 million when the ratio of our Net Borrowings to EBITDA is 2.0:1 or less; or (2) the total amount of such acquisition is fully financed by available excess cash flow.
The borrower may not, without prior consent from the lenders, enter into any amalgamation, demerger, merger or reorganization except an intra-group reorganization on a solvent basis.
The credit facility agreement contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreement is governed by English law.
Credit Facility Agreements for Yakutugol and Southern Kuzbass Coal Company from Gazprombank
General
In April 2012, our subsidiaries Yakutugol and Southern Kuzbass Coal Company entered into two separatenon-revolving credit facility agreements with Gazprombank for a total amount of $500.0 million: $300.0 million was made available to Yakutugol and $200.0 million was made available to Southern Kuzbass Coal Company, both for a period of up to five years with a three-year grace period obtained for the purpose of funding operational activities and refinancing of short-term debt. As of December 31, 2014, the facilities were fully drawn.
In August and December 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with Gazprombank to restructure debt in a total amount of $500.0 million. In January 2016, the restructuring of these credit facilities became effective. As a result of the conversion into rubles, the debt of Yakutugol amounted to approximately 22.8 billion rubles and of Southern Kuzbass Coal Company amounted to approximately 15.3 billion rubles.
In June 2016, we signed amendments to the credit facility agreements under which accrued and unpaid interests in the amount of 3.9 billion rubles were capitalized. We repaid this amount and interest accrued on it during the period from April 15, 2017 to March 30, 2018.
On January 9, 2020, we received consent from Gazprombank waiving the accelerated repayment of debt principal until April 1, 2020.
Interest rate and interest period
Starting from the effective date, the interestInterest under the credit facilities is payable monthly at the CBR key rate plus 1.5% per year.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interests are being capitalized and paid in accordance with the principal repayment schedule. Payable interest rate: 8.75% if our Total Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Total Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Total Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Total Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not exceed the CBR key rate plus 1.5% per year.
Repayment and prepayments
The final maturity date is April 20, 2022. Repayment is to be made in equal monthly installments starting from February 17, 2020. The borrowers may prepay the loans in full or in part with a 30 day prior notice to the lender.
Guarantee
The borrowers’ obligations are guaranteed by Mechel Mining, Mechel Carbon, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel and cross guarantee between Southern Kuzbass Coal Company and Yakutugol.
Security
Yakutugol’s obligations under the credit facility agreement are secured by a pledge of 25%+1 share in each of Korshunov Mining Plant, Port Posiet, Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant, Izhstal and
Urals Stampings Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share of Yakutugol, 25%+1 share of Mechel Mining and 25% of registered capital of Port Temryuk, as well as 33.3% of common shares of Izhstal.Temryuk.
Southern Kuzbass Coal Company’s obligations under the credit facility agreement are secured by a pledge of 25%+1 share in each of Korshunov Mining Plant, Port Posiet, Izhstal and Beloretsk Metallurgical Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share in each of Yakutugol and Urals Stampings Plant, 25%+1 share of Mechel Mining and 25% of registered capital in each of Port Temryuk and Bratsk Ferroalloy Plant, as well as 33.3% of common shares of Izhstal.Plant.
In March 2016, we mortgaged the Ulak-Elga rail line under the credit facility agreements.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with certain financial and certainnon-financial covenants.
Under the credit facility agreements, Mechel group’s ratio of Total Borrowings to EBITDA shall not exceed 5.5:1 in 2017, 4.5:1 in 2018, 3.5:1 in 2019 and 3.0:1 in 2020. Mechel group’s ratio of EBITDA to Consolidated Financial Expense shall not be less than 1.50:1 in 2017, 1.75:1 in 2018, 2.0:1 in 2019 and 2.5:1 in 2020. During the period from 2017 to 2020, we also have to comply with the ratios of Cash flow from operating activities to EBITDA and EBITDA to Revenues at the levels of 80% and 20%, respectively.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreements are governed by Russian law.
Credit Facility Agreements for Yakutugol and Southern Kuzbass Coal Company from Gazprombank
General
In April 2013, our subsidiaries Yakutugol and Southern Kuzbass Coal Company entered into separatenon-revolving credit facility agreements with Gazprombank for a total amount of $889.0 million: $400.0 million was made available to Southern Kuzbass Coal Company and $489.0 million was made available to Yakutugol, both for a period of up to five years with a three-year grace period obtained for the purpose of funding operational activities and refinancing of short-term debt provided by Gazprombank. As of December 31, 2014, the amount outstanding under the Southern Kuzbass Coal Company facility was $400.0 million and the amount outstanding under the Yakutugol facility was $385.8 million.
In August and December 2015, Yakutugol and Southern Kuzbass Coal Company signed amendments to their credit facility agreements with Gazprombank to restructure debt in a total amount of $785.8 million. In January 2016, the restructuring of these credit facilities became effective. As a result of the conversion into rubles, the debt of Yakutugol amounted to approximately 30.5 billion rubles and of Southern Kuzbass Coal Company amounted to approximately 30.4 billion rubles.
In June 2016, we signed amendments to the credit facility agreements under which accrued and unpaid interests in the amount of 6.4 billion rubles were capitalized. We repaid this amount and interest accrued on it during the period from April 15, 2017 to March 30, 2018.
On January 9, 2020, we received consent from Gazprombank waiving the accelerated repayment of debt principal until April 1, 2020.
Interest rate and interest period
Starting from the effective date, the interestInterest under the credit facilities is payable monthly at the CBR key rate plus 1.5% per year.
During the grace period, we apply payable interest rate for interest repayment. The remaining unpaid interests are being capitalized and paid in accordance with the principal repayment schedule. Payable interest rate: 8.75% if our Total Borrowings/EBITDA ratio is equal to 6.01 or above; 9.50% if our Total Borrowings/EBITDA ratio is equal to or above 5.01 and less than 6.00; and 10.50% if our Total Borrowings/EBITDA ratio is equal to or above 4.01 and less than 5.00. If our Total Borrowings/EBITDA ratio is 4.00 or less, the accrued interest shall be paid in full. In all of the above cases, payable interest rate shall not exceed the CBR key rate plus 1.5% per year.
Repayment and prepayments
The final maturity date is April 20, 2022. Repayment is to be made in equal monthly installments starting from February 17, 2020. The borrowers may prepay the loans in full or in part with a 10 day prior notice to the lender.
Guarantee
The borrowers’ obligations are guaranteed by Mechel Mining, Mechel Carbon, Korshunov Mining Plant, Urals Stampings Plant, Chelyabinsk Metallurgical Plant, Mechel and cross guarantee between Southern Kuzbass Coal Company and Yakutugol.
Security
Yakutugol’s obligations under the credit facility agreement are secured by a pledge of 25%+1 share in each of Korshunov Mining Plant, Port Posiet, Chelyabinsk Metallurgical Plant, Beloretsk Metallurgical Plant, Izhstal and Urals Stampings Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share of Yakutugol, 25%+1 share of Mechel Mining and 25% of registered capital of Port Temryuk, as well as 33.3% of common shares of Izhstal.Temryuk.
Southern Kuzbass Coal Company’s obligations under the credit facility agreement are secured by a pledge of 25%+1 share in each of Korshunov Mining Plant, Port Posiet, Izhstal and Beloretsk Metallurgical Plant, 45%+1 share of Southern Kuzbass Coal Company, 50%+1 share in each of Yakutugol and Urals Stampings Plant, 25%+1 share of Mechel Mining and 25% of registered capital in each of Port Temryuk and Bratsk Ferroalloy Plant, as well as 33.3% of common shares of Izhstal.Plant.
In March 2016, we mortgaged the Ulak-Elga rail line under the credit facility agreements.
Covenants and other matters
For the relevant period ending on December 31, 2017,2019, we were not in compliance with certain financial and certainnon-financial covenants.
Under the credit facility agreements, Mechel group’s ratio of Total Borrowings to EBITDA shall not exceed 5.5:1 in 2017, 4.5:1 in 2018, 3.5:1 in 2019 and 3.0:1 in 2020. Mechel group’s ratio of EBITDA to Consolidated Financial Expense shall not be less than 1.50:1 in 2017, 1.75:1 in 2018, 2.0:1 in 2019 and 2.5:1 in 2020. During the period from 2017 to 2020, we also have to comply with the ratios of Cash flow from operating activities to EBITDA and EBITDA to Revenues at the levels of 80% and 20%, respectively.
The credit facility agreements contain certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults to other debt.
The credit facility agreements are governed by Russian law.
Syndicated Loan for Chelyabinsk Metallurgical Plant from VTB Bank
General
On July 12, 2018, Chelyabinsk Metallurgical Plant entered into a syndicated credit facility agreement with VTB Bank and VTB Bank (Europe) SE for a total amount of up to €950.0 million (two tranches of $1,004 million and $38 million in euro equivalent) to refinance the existingpre-export credit facilities of Yakutugol and Southern Kuzbass Coal Company and for the purposes of funding operating activities. We drew down a total of €896.7 million under this credit facility.
Interest rate and interest period
Interest under the credit facility is payable monthly at 1M EURIBOR plus a margin of 5.5% per year. The lender may increase the interest rate by 1% per year if the borrower fails to meet certain obligations under the credit facility.
Repayment and prepayments
The credit facility is repayable in equal monthly installments starting on April 6, 2020. The final maturity date is April 6, 2022. The borrower may prepay the loan in full or in part subject to simultaneous compliance with certain requirements.
Guarantee
The borrower’s obligations are guaranteed by Mechel, Mechel Mining, Mechel Carbon, Yakutugol, Southern Kuzbass Coal Company, Korshunov Mining Plant, Urals Stampings Plant, Bratsk Ferroalloy Plant, Mecheltrans and Mechel Service.
Security
The borrower’s obligations are secured by a pledge of50%-2 shares of Yakutugol, 50%+2 shares of Southern Kuzbass Coal Company and 25%+1 share of Korshunov Mining Plant. We are obliged to provide additional security to VTB Bank.
Covenants and other matters
For the relevant period ending on December 31, 2019, we were not in compliance with financial and certainnon-financial covenants.
Under the credit facility agreement, Mechel group’s ratio of Net Borrowings to EBITDA shall not exceed 5.00:1 until December 31, 2020 and thereafter. Mechel group’s ratio of EBITDA to Net Interest Expense shall not be less than 2.25:1 until December 31, 2020 and thereafter. Financial covenants are tested on a quarterly basis.
The credit facility contains certain customary representations and warranties, affirmative covenants, notice provisions and events of default, including change of control and cross-defaults relating to other debt, as well as limitations on payment of dividends, acquisitions and disposals andnon-core transactions.
The credit facility agreement is governed by Russian law.
Exchange Controls
The Federal LawNo. 173-FZ “On Currency Regulation and Currency Control,” effective from June 18, 2004, as amended, sets forth certain restrictions on settlements between residents of Russia with respect to transactions involving foreign securities (including ADSs), including requirements for settlement in Russian rubles.
Repatriation of Export Proceeds
Russian companies must repatriate 100% of their receivables from the export of goods and services and/or the provision of loans (with a limited number of exceptions concerning, in particular, certain types of secured financing) within the time frame provided under the respective agreement.
Restrictions on Remittance toNon-residents
The Foreign Investments Law guarantees foreign investors the right to repatriate their earnings from Russian investments. However, the evolving Russian exchange control regime may affect investors’ ability to do so. Rubleso in the future. Currently, ruble dividends on shares may be paid to the depositary or its nominee and converted into U.S. dollars by the depositary for distribution to owners of ADSs without restriction. In addition, ADSs may be sold bynon-residents of Russia for U.S. dollars outside Russia without regard to Russian currency control laws so long as the buyer is not a Russian resident for currency control purposes.
Taxation
The following discussion is not intended as tax advice to any particular investor. No opinion of counsel will be issued with respect to the following discussion and, therefore, such discussion is not based on an opinion of counsel. It is also not a complete analysis or listing of all potential U.S. federal or Russian income and withholding tax consequences of ownership of shares or ADSs. We urge such holders to consult their tax advisers regarding the specific U.S. federal, state and local and Russian tax consequences of the ownership and disposition of the shares or ADSs, including their eligibility for the benefits of a double tax treaty between the Russian Federation and their country of residence, in light of their particular facts and circumstances, as well as the applicability and effect of state, regional and local tax laws and foreign tax law.
Russian Income and Withholding Tax Considerations
The following is a summary of certain Russian tax considerations relevant to payments to Russian resident andnon-resident holders of the shares and ADSs and to the purchase, ownership and disposition of the shares and ADSs by Russian resident andnon-resident holders. This summary is based on the laws of Russia in effect as of the date of this document. The discussion with respect to Russian legislation is based on our understanding of current Russian law and tax rules, which are subject to frequent change and varying interpretations.
This summary does not seek to address the applicability of, and procedures in relation to, taxes levied by the regions, municipalities or othernon-federal level authorities of the Russian Federation. Nor does the summary seek to address the availability of double tax treaty relief, and it should be noted that there might be practical difficulties involved in claiming relief under an applicable double tax treaty. You should consult your own professional advisors regarding the tax consequences of investing in the shares and ADSs. No representations with respect to the Russian tax consequences to any particular holder are made hereby.
The Russian tax rules applicable to ADSs are characterized by uncertainties and by an absence of special provisions with respect to transactions involving ADSs. Both the substantive provisions of Russian tax law and the interpretation and application of those provisions by the Russian authorities may be subject to more rapid and unpredictable change than in a jurisdiction with more developed capital markets and a more developed taxation system. In particular, the interpretation and application of such provisions will in practice rest substantially with local tax inspectors.
For the purposes of this summary, a “Russian resident holder” means: (1) an individual holder of the shares and ADSs, actually present in the Russian Federation for 183 days or more in 12 consecutive months; or (2) an organization recognized as a tax resident of the Russian Federation, namely (i) an organization or an individual entrepreneur, organized under Russian law, (ii) a foreign organization recognized as a tax resident of the Russian
Federation in accordance with the international tax treaty of the Russian Federation, and (iii) a foreign organization which place of management is the Russian Federation, unless otherwise provided by the international tax treaty of the Russian Federation; or (3) an organization, organized under a foreign law, that holds and disposes of the shares and ADSs through its permanent establishment in Russia. Individual presence in Russia is not considered interrupted if an individual departs for short periods (less than six months) for the purpose of medical treatment or education, as well as for the performance of labor or other duties related to the execution of work or services at offshore raw hydrocarbon deposits.
For the purposes of this summary, a“non-resident holder” is a holder of the shares or ADSs which is not qualified to be a Russian resident holder as defined in the previous paragraph.
Taxation of acquisition of the shares and ADSs
No Russian tax implications should arise for holders of the shares and ADSs upon purchase of the shares and ADSs. However, starting from 2015, Russian resident holders are required to notify tax authorities about their participation in Russian organizations (in case of direct participation interests in excess of 10%) not later than one month from the date of commencement of such participation. In addition, under certain conditions a taxable material gain may arise for individuals if the shares and ADSs are purchased at a price below the deemed market value. Also, in certain circumstances, a Russian resident holder that is an organization acquiring the shares or ADSs is generally obliged to act as a tax agent to withhold profitincome tax on proceeds from the sale of the shares or ADSs to be transferred to anon-resident holder disposing such shares or ADSs. We urge such holders to consult their tax advisers regarding specific tax consequences of acquisition of the shares or ADSs.
Taxation of dividends
A Russian company that pays dividends is generally obliged to act as a tax agent to withhold tax on the dividends and remit the amount of tax due to the Russian Federation state budget. In some cases, tax agent’s functions are performed by other legal entities. However, the applicable withholding tax rate will depend on the status of the dividend’s recipient and on the availability with the Russian company paying dividends on the date of such payment of documents confirming the status of the tax resident of the respective state (country) in relation to the recipient of income.
Russian resident holders
Shares
Dividends paid to a Russian resident holder of the shares that is a Russian organization or an individual will be generally subject to Russian withholding tax at the rate of 13%. Dividends received by Russian organizations are subject to withholding tax at the rate of 0% provided that the recipient organization constantly owns for a period of 365 calendar days or more at least 50% of participation shares in the share capital of the paying organization or share depositary receipts qualifying for dividends equal to at least 50% of the total amount of dividends paid by the organization. However, it is difficult to predict how the Russian tax authorities may interpret the conditions listed above. Therefore, there can be no assurance that the 0% withholding tax rate will apply.
The effective rate of this tax may be lower than 13% (other than tonon-resident companies andnon-resident individuals) owing to the fact that generally this tax should be calculated by multiplying the basic tax rate (13%) by the difference between (i) the dividends to be distributed by us to our shareholders, and (ii) dividends
collected by us in the current and preceding tax periods from other Russian persons (except for dividends which under the current Russian tax law are taxable at the rate of 0% and provided that the amount of dividends previously was not included when determining the tax base which is determined in respect of income received by a Russian organization in the form of dividends).
Since 2014, when paying dividends in respect of shares that are recorded on depo account of foreign nominee holder and depo account of foreign authorized holder, the tax should be calculated and withheld by the depositary (tax agent), which opened these accounts. Effective from January 1, 2014, the reduced tax rate of 0% does not apply on dividend payments for such shares. Under Russian law, the general rate of 13% is applied, subject to the submission of certain information to the tax agent. If such information has not been submitted to the tax agent in the prescribed manner and in a certain period of time, the tax rate of 15% is applied.
A holder that is a foreign organization holding shares through a permanent establishment in Russia is entitled to pay this tax to the Russian budget on its own behalf (i.e., without a Russian entity that distributes the dividends to such holder acting as a tax agent for withholding tax) if such holder provides the Russian entity that acts as the Russian tax agent with specific documentary evidence confirming dividend income is attributable to a permanent establishment of the holder in Russia. Such evidence includes a notarized copy of the form confirming registration of the holder with the Russian tax authorities. A notification must also be issued by the local tax authorities at the holder’s place of tax registration confirming dividend income is attributable to the permanent establishment of the holder in Russia.
Dividends paid to a Russian establishment of a foreign organization are taxable at a rate which is set based onnon-discrimination provisions of a double tax treaty between Russia and the country of tax residence of the respective foreign organization. As the Russian Tax Code does not specifically provide for the application by the Russian establishment of a foreign organization of a rate of 0% in respect of received dividends, it is not possible to guarantee the application of this rate.
Since 2019, income in the form of property (property rights) received by a shareholder of an organization upon withdrawal from the organization or when distributing the property of the liquidated organization among its shareholders in an amount exceeding the actually paid (regardless of the form of payment) share price is treated as dividends. For the purposes of income taxation, Russian organizations recognize property at a market value in the above cases. In case of a loss, such loss may be included in expenses when calculating corporate income tax.
ADSs
There are uncertainties in relation to withholding tax on dividends payable to Russian resident holders of ADSs primarily because the taxation of dividends payable under ADSs is not specifically addressed under Russian tax law.
Effective from January 1, 2014, so as to apply the tax rate of 13% when paying dividends under ADSs to residents the tax agent must be submitted with certain information in the prescribed manner and in a certain period of time. If such information has not been submitted to the tax agent, the tax rate of 30% is applied. Thus, starting from 2014, the tax agent may be obliged to withhold tax at the rate of 30% (due to the absence of the required information) and Russian holders of ADSs may be unable to use the rate of 13% provided by Russian tax law for residents.
Upon receiving dividends, Russian holders which are organizations may be required to pay additional Russian profitincome tax at the rate of 13% (the rate applied to dividends received fromnon-residents) or 20% (if the income received will not be recognized as dividends) while Russian holders who are individuals may be required to pay Russian personal income tax at the rate of 13%. There is also no established procedure providing for the refund of tax withheld from dividends payable through the depositary to Russian resident holders of ADSs. Accordingly, Russian residents are urged to consult their own tax advisors regarding the tax treatment of the purchase, ownership and disposition of the ADSs.
A holder of the ADSs that is a foreign organization conducting its business through a permanent establishment in Russia is entitled to pay this tax to the Russian budget on its own behalf (i.e., without a Russian entity that distributes the dividends to such holder acting as a tax agent for withholding tax) if such holder
provides the Russian entity that acts as the Russian tax agent with specific documentary evidence confirming
dividend income is attributable to a permanent establishment of the holder in Russia. Such evidence includes a notarized copy of the form confirming registration of the holder with the Russian tax authorities. A notification must also be issued by the local tax authorities at the holder’s place of tax registration confirming dividend income is attributable to the permanent establishment of the holder in Russia.
Non-resident holders
Russia participates in the international automatic exchange of financial information with the competent authorities of foreign states (territories). As part of this exchange, the organizations of the Russian financial market, including professional securities market participants engaged in brokerage and/or securities management and/or depositary activities, are obliged to send information about clients, their beneficiaries and controlling parties who are foreign tax residents to the Russian tax service. Special attention is given to individuals whose account balance exceeds $1 million or the equivalent of such amount in another currency and legal entities with a capital over $250 thousand or the equivalent of such amount in another currency.
Shares
Dividends paid tonon-resident holders of shares will generally be subject to Russian withholding tax, which the tax agent will withhold. Under Russian law dividends paid to anon-resident holder which is an organization or individual will be subject to Russian withholding tax at rates of 15% or 30% in certain cases. Withholding tax on dividends may be generally reduced under the terms of a double tax treaty between the Russian Federation and the country of tax treaty residence of anon-resident holder of the shares.
Since 2014, when paying dividends in respect of shares issued by Russian organizations that are recorded on depo account of foreign nominee holder, depo account of foreign authorized holder and/or depo account of depositary programs, the tax should be calculated and withheld by the depositary (tax agent), which opened these accounts. Effective from January 1, 2014, the reduced tax rate established in accordance with certain provisions of the double tax treaty does not apply on dividend payments under such shares. The general rate established by such treaty and not accounting for benefits or the rate of 15% provided by Russian law are applied, subject to the submission of certain information to the tax agent. If such information has not been submitted to the tax agent in the prescribed manner and in a certain period of time, a tax rate of 30% is applied.
Thus, starting from 2014, the tax agent is obliged to withhold tax at the general rate established by the tax treaty or at the rate of 15% (in the absence of the tax treaty) or at the rate of 30% (in the absence of the required information) andnon-resident holders of shares may be unable to benefit from the tax treaty. Althoughnon-resident holders of shares may apply for a refund of a portion of the tax withheld under an applicable tax treaty, the procedure to do so may be time-consuming and no assurance can be given that the Russian tax authorities will grant a refund.
Since 2019, income in the form of property (property rights) received by a shareholder of an organization upon withdrawal from the organization or when distributing the property of the liquidated organization among its shareholders in an amount exceeding the actually paid (regardless of the form of payment) share price is treated as dividends.
ADSs
Comments provided in the previous section (see “— Taxation of dividends —Non-resident holders — Shares”) are also applicable to ADSs. Effective from January 1, 2014, the reduced tax rate established in accordance with certain provisions of the double tax treaty does not apply on dividend payments under ADSs. The general rate established by such treaty and not accounting for benefits or the rate of 15% provided by Russian law are applied, subject to the submission of certain information to the tax agent. If such information has not been submitted to the tax agent in the prescribed manner and in a certain period of time, a tax rate of 30% is applied.
Thus, starting from 2014, the tax agent is obliged to withhold tax at the general rate established by the tax treaty or at the rate of 15% (in the absence of the tax treaty) or at the rate of 30% (in the absence of the required information) andnon-resident holders of ADSs may be unable to benefit from the tax treaty. Althoughnon-resident holders of ADSs may apply for a refund of a portion of the tax withheld under an applicable tax treaty, the procedure to do so may be time-consuming and no assurance can be given that the Russian tax authorities will grant a refund. See “— Tax treaty procedures” below.
The dividends taxation rate may be reduced to 10% under the United States-Russia income tax treaty forU.S. non-resident holders. Under current regulations, authorization from the Russian tax authorities is not required to allow the tax agent to withhold tax at a reduced rate under applicable double tax treaties provided that all other requirements are met. See “— Tax treaty procedures.”
If the tax agent is not submitted with the prescribed by the tax legislation information, it will be obliged to withhold tax at the rate of 30%. In this case, U.S. holders qualifying for a reduced rate under the United States-Russia income tax treaty may claim a refund from the Russian tax authorities/tax agents, depending on the status of a holder, within three years.years, if otherwise is not provided for by the results of a mutual agreement procedure in accordance with the international tax treaty of the Russian Federation. There is significant uncertainty regarding the availability and timing of such refunds.
Taxation of capital gains
The following sections summarize the taxation of capital gains in respect of the disposition of the shares and ADSs.
Russian resident holders
As the Russian legislation related to taxation of capital gains derived by Russian resident holders (including organizations and individuals) in connection with ADSs is not entirely clear, we urge Russian residents to consult their own tax advisors regarding the tax treatment of the purchase, ownership and disposition of ADSs.
However, since 2015, Russian tax legislation does not recognize as a sale or other disposition of securities: (i) the cancellation of ADSs upon receipt of representing securities; (ii) the transfer of securities at placement of ADSs certifying the rights for represented securities.
Organizations
Capital gains arising from the sale of the shares and ADSs by a Russian resident holder that is an organization will be taxable at the regular Russian corporate profitincome tax rate of 20%.
Since 2016,November 27, 2018, sale of the shares and ADSs which were acquired after January 1, 2011 is taxable at a rate of 0% provided that there is a documentary evidence that on the date of sale of such shares they were continuously owned by Russian resident holders on the basis of the right of ownership or other proprietary right for more than five years, and provided that such shares constitute the charter capital of Russian organizations in which no more than 50% of assets directly or indirectly consist of immovable property located in Russia. Until November 27, 2018, the above conditions applied only to the sale of the shares and ADSs which were acquired after January 1, 2011.
However, it should be noted that the determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an ongoing basis, and the relevant Russian legislation in this respect is not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia will not constitute more than 50% of the company’s assets as at the date of the sale of shares and ADSs by residents.
Russian tax legislation contains a requirement that a profit arising from activities connected with securities quoted on a stock exchange must be calculated and accounted for separately from a profit from activities connected with securities that are not quoted on a stock exchange and from other profits. Since 2015, income (expenses) from operations with securities quoted on a stock exchange is recorded in the general tax base in accordance with generally established procedures. Therefore, Russian resident holders may be able to apply losses arising in respect of the listed shares and ADSs in the current base for profitincome tax.
Individuals
Capital gains arising from the sale, exchange or other disposition of the shares and ADSs by individuals who are Russian resident holders must be declared on the holder’s tax return and are subject to personal income tax at a rate of 13%.
Since 2016,November 27, 2018, sale of the shares and ADSs which were acquired after January 1, 2011 by Russian individuals resident holders is not subject to personal income tax provided that there is a documentary evidence that on the date of
sale of such shares they were continuously owned by Russian resident holders on the basis of the right of ownership or other proprietary right for more than five years, and provided that such shares constitute the charter capital of Russian organizations in which no more than 50% of assets directly or indirectly consist of immovable property located in Russia. Until November 27, 2018, the above conditions applied only to the sale of the shares and ADSs which were acquired after January 1, 2011.
However, it should be noted that the determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an ongoing basis, and the relevant Russian legislation in this respect is not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia will not constitute more than 50% of the company’s assets as at the date of the sale of shares and ADSs by residents.
The income in respect of sale of the shares or ADSs by an individual is calculated as sale proceeds less documented expenses related to the purchase of these securities (including cost of securities and expenses associated with purchase, safe-keeping and sale of these securities).
Under Russian law, the acquisition value can be deducted by the source of the payment, if the sale was made by a holder through a professional trustee, dealer or broker that is a Russian organization or a foreign company with a permanent establishment in Russia. This professional trustee, dealer or broker should also act as a tax agent and withhold the applicable tax. Such a tax agent will be required to report to the Russian tax authorities the amount of income realized by the individual and tax withheld upon the sale of the shares and ADSs not later than Aprilon March 1 of the year following the reporting year.
Furthermore, according to certain conditions, individuals may have taxable material gain at the rate of 13% if the shares and ADSs are acquired at a price below conventional market value.
Since January 1, 2020, a Russian organization or individual entrepreneur that makes payments under securities sale and purchase (exchange) agreements can be recognized as a tax agent.
Non-resident holders
Since 2015, Russian tax legislation does not recognize as a sale or other disposition of securities: (i) the cancellation of ADSs upon receipt of representing securities; (ii) the transfer of securities at placement of ADSs certifying the rights for represented securities.
Russia participates in the international automatic exchange of financial information with the competent authorities of foreign states (territories). As part of this exchange, the organizations of the Russian financial
market, including professional securities market participants engaged in brokerage and/or securities management and/or depositary activities, are obliged to send information about clients, their beneficiaries and controlling parties who are foreign tax residents to the Russian tax service. Special attention is given to individuals whose account balance exceeds $1 million or the equivalent of such amount in another currency and legal entities with a capital over $250 thousand or the equivalent of such amount in another currency.
Organizations
Capital gains arising from the sale, exchange or other disposition of the shares and ADSs by organizations that arenon-resident holders should not be subject to tax in Russia if not more than 50% of our assets directly or indirectly consist of immovable property located in Russia. If more than 50% of our assets were to consist of immovable property located in Russia, organizations that arenon-resident holders of the shares and ADSs should be subject (except as described below) to a 20% withholding tax on the gross proceeds from sale, exchange or other disposition of the shares and ADSs or 20% withholding tax on the difference between the sales, exchange or other disposition price and the acquisition costs of the shares and ADSs.
However, it should be noted that the determination of whether more than 50% of our assets consist of immovable property located in Russia is inherently factual and is made on an ongoing basis, and the relevant Russian legislation in this respect is not entirely clear. Hence, there can be no assurance that immovable property owned by us and located in Russia will not constitute more than 50% of the company’s assets as at the date of the sale of shares and ADSs bynon-residents. Certain international double tax treaties may provide for protection from the Russian taxation in such instances.
Where the shares and ADSs are sold by organizations beingnon-resident holders to persons being organizations recognized as tax residents of the Russian Federation, even if the resulting capital gain is considered taxable in Russia, there is currently no mechanism under which the purchaser will be able to withhold the tax and remit it to the Russian budget.
Individuals
The taxation of the income ofnon-resident individuals depends on whether the income is received from Russian ornon-Russian sources. Russian tax law considers the place of sale as an indicator of source. Accordingly, the sale of the shares and ADSs outside of Russia by individuals who arenon-resident holders should not be considered Russian source income and, therefore, should not be taxable in Russia. However the Russian tax law gives no clear indication as to how the place of sale of the shares and ADSs should be defined in this respect. Therefore, the Russian tax authorities may have a certain amount of flexibility in concluding whether a transaction is within Russia or outside of Russia.
The sale, exchange or other disposal of the shares and ADSs bynon-resident holders in Russia will be considered Russian source income and will be subject to tax at the rate of 30% on the difference between the sales price and the acquisition value of such shares and ADSs as well as other documented expenses, such as depositary expenses and broker fees, among others. Under Russian law, the acquisition value can only be deducted by the source of the payment, if the sale was made by anon-resident holder through a professional trust manager, dealer or broker that is a Russian organization or a foreign company with a permanent establishment in Russia. Such professional trust manager, dealer or broker should also act as a tax agent and withhold the applicable tax. Such a tax agent will be required to report to the Russian tax authorities the amount of income realized by thenon-resident individual and tax withheld upon the sale of the shares and ADSs not later than on AprilMarch 1 of the year following the reporting year.
Otherwise, if the sale is made to other organizations and individuals, generally no withholding needs to be made and thenon-resident holder will have an obligation to file a tax return, report his realized profit and apply for a deduction of acquisition expenses (which includes filing of support documentation).
Although Russian tax law imposes this responsibility only on professional trust manager, brokers or dealers, in practice, the tax authorities may require organizations recognized as tax residents of the Russian Federation that are not professional trust manager, dealers or brokers to act as tax agents and withhold the applicable tax when purchasing securities fromnon-resident individuals.
In some circumstances, anon-resident holder may be exempt from Russian personal income tax on the sale, exchange or other disposition of the shares and ADSs under the terms of a double tax treaty between the Russian Federation and the country of residence of thenon-resident holder. Under the United States-Russia income tax treaty, capital gains from the sale of the shares and/or ADSs by U.S. holders should be relieved from taxation in Russia, unless 50% or more of our assets (as the term “fixed assets” is used in the Russian version of the United States-Russia income tax treaty) were to consist of immovable property located in Russia. If this 50% threshold is not met, individuals who are U.S. holders may seek to obtain the benefit of the United States-Russia income tax treaty in relation to capital gains resulting from the sale, exchange or other disposition of the shares and/or ADSs.
In order to apply the provisions of relevant double tax treaties, the individual holders should receive clearance from the Russian tax authorities as described below. See “— Tax treaty procedures” below.
Tax treaty procedures
The Russian Tax Code does not contain a requirement that anon-resident holder that is an organization must obtain tax treaty clearance from the Russian tax authorities prior to receiving any income in order to qualify for benefits under an applicable tax treaty. However, anon-resident organization seeking to obtain relief from Russian withholding tax under a tax treaty must provide to a tax agent, before the income payment date, a confirmation of its tax treaty residence that complies with the applicable requirements in advance of receiving the relevant income. Starting from 2016, in order to apply the provisions of the international treaties of the Russian Federation, foreign organizations will also have to provide to the Russian organization which pays the income a confirmation that the foreign organization has an actual right to receive income.income (is a beneficiary owner of the income).
Starting from 2016, the rules of elimination of double taxation in respect of individuals act in a new version. Anon-resident individual who derives income from a source in the Russian Federation in order to implement the provisions of international tax treaties will have to provide the tax agent on the income payment date a confirmation that an individual-recipient of income is a tax resident in the respective foreign country. In order to confirm the status of a tax resident an individual may use the passport of a foreign citizen or any other identification document, established by the federal law or recognized by the international treaty as such. If these documents do not make it possible to confirm the existence of an individual’s tax resident status of a foreign country with which the international treaty is concluded, the tax agent should also be provided with the official confirmation of this status. Such confirmation should be issued by the competent authority of the respective foreign country authorized to issue such confirmations on the basis of the international tax treaty of the Russian Federation. If such confirmation is in a foreign language, an individual provides a notarized translation into Russian. It should be noted that the tax agent in the application of preferential provisions of the international treaty must submit to the tax authority at the place of its registration the information on foreign individuals, income paid to them from which tax had not been withheld on the basis of the international treaty, as well as the refund of the tax.
In order to apply the provisions of the international treaties of the Russian Federation, foreign organizations will have to provide to the tax agent which pays the income a confirmation that the foreign organization has a residence in the country with which the Russian Federation has the international tax treaty. Such confirmation should be certified by the competent authority of the respective foreign country. If such confirmation is in a foreign language, the tax agent should be provided with a translation into Russian. In addition, starting from 2017,2016, foreign organizations will have to provide the tax agent which pays the income with a confirmation that the foreign organization has an actual right to receive income (is a beneficiary owner of the income).
Starting from January 1, 2020, international organizations established in accordance with international treaties of the Russian Federation are not required to provide confirmation of a permanent location. Such international organizations provide confirmation that they have the actual right to receive the relevant income.
In 2018, Russian legislation was amended in terms of confirming the actual right to receive income. The amendments apply to income payments made from January 1, 2018 and provide for a “pass-through approach” to identification of a party that has actual right to income. In accordance with this approach, if a foreign organization (foreign structure without forming a legal entity) that receives income recognizes a lack of actual right to receive such income, the provisions of the international treaties of the Russian Federation and/or the Russian Tax Code can be applied to another party if this party has actual right to such income, and, in case of income payment in the form of dividends, if this party directly and/or indirectly participates in the Russian organization that paid income in the form of dividends, with the submission of supporting documents to the tax agent which pays such income. Moreover, each subsequent party which directly participates in the party that recognized the lack of actual right to income in the form of dividends (in the respective sequence of participation) is entitled to recognize the actual right to such income.
The submission by the foreign organization of the above confirmations to the tax agent which pays the income before the income payment date constitutes grounds for an exemption of such income from withholding or withholding at reduced rates.
In the absence of such information, the tax agent is not entitled to apply rates established in accordance with the terms of the double tax treaty between the Russian Federation and the country of residence of thenon-resident holder, and will have to apply the rate of 15% or 30% in certain cases.
At the same time, Russian legislation does not contain a specific list of documents that can be used as a confirmation of both the actual right to receive income and the actual residence of the foreign organization, thereby admitting their ambiguous interpretation which may lead to an additional tax burden for the foreign organization.
If anon-resident holder that is an organization does not obtain double tax treaty relief at the time that income is received and tax is withheld by a Russian tax agent, thenon-resident holder may apply for a refund within three years from the end of the tax period (a calendar year) in which the tax was withheld. To process a claim for a refund, the Russian tax authorities require (i) a confirmation of the tax treaty residence of thenon-resident at the time the income was paid, (ii) an application for the refund of the tax withheld in a format provided by the Russian tax authorities, and (iii) copies of the relevant contracts under which the foreign entity received income as well as payment documents confirming the payment of the tax withheld to the Russian budget (Form 1012DT for dividends and interest and Form 1011DT for other income are designed by the Russian tax authorities to combine requirements (i) and (ii) specified above and recommended for application). The Russian tax authorities will require a Russian translation of the above documents if they are prepared in a foreign language. The refund of the tax withheld should be granted within one month of the filing of the above set of documents with the Russian tax authorities. However, procedures for processing such claims have not been clearly established, and there is significant uncertainty regarding the availability and timing of such refunds. Since 2020, the tax refund period may be different as determined by the results of a mutual agreement procedure in accordance with the international tax treaty of the Russian Federation.
Since 2014, in respect of dividend payments on shares (including represented by ADSs) that are recorded on depo account of foreign nominee holder, depo account of foreign authorized holder and depo account of
depositary programs, a general rate established by the double tax treaty and not accounting for benefits is applied. Refund of the overpaid tax is made to the taxpayer upon the submission to the tax authorities of the documents mentioned above, as well as the following documents: (i) document confirming the ownership of shares by the taxpayer on the date determined by the decision of the Russian company on payment of income, (ii) document confirming the amount of income actually received on shares, (iii) documents containing
information about the depositary, which transferred the income on shares in favor of a foreign organization (management company), which lawfully carried out the record of rights to shares held by the taxpayer, and (iv) document confirming that the legal entity, which carried out the record of rights of share ownership on the date determined by the decision of the Russian company on payment of income, complied with additional conditions provided by Russian tax legislation or international double tax treaty for the application of the reduced tax rate when paying dividends on shares. Due to the fact that these regulations entered into force only on January 1, 2014, the practice of such refunds have not been established yet, and that is why it is not possible to exclude risks associated with a possiblenon-refund of the tax withheld.
A resident of the United States who is fully eligible for benefits under the United States-Russia income tax treaty is referred to in this “Russian Income and Withholding Tax Considerations” section as a “U.S. holder.” Subject to certain provisions of the United States-Russia income tax treaty relating to limitations on benefits, a person generally will be a resident of the United States for treaty purposes and entitled to treaty benefits if such person is:
liable, under the laws of the United States, for U.S. federal income tax (other than taxes in respect only of income from sources in the United States or capital situated therein) by reason of the holder’s domicile, residence, citizenship, place of incorporation, or any other similar criterion (and, for income derived by a partnership, trust or estate, residence is determined in accordance with the residence of the person liable to tax with respect to such income); and
not also a resident of the Russian Federation for purposes of the United States-Russia income tax treaty.
The benefits under the United States-Russia income tax treaty discussed in this document generally are not available to United States persons who hold shares or ADSs in connection with the conduct of a business in the Russian Federation through a permanent establishment as defined in the United States-Russia income tax treaty. Subject to certain exceptions, a United States person’s permanent establishment under the United States-Russia income tax treaty is a fixed place of business through which such person carries on business activities in the Russian Federation (generally including, but not limited to, a place of management, a branch, an office and a factory). Under certain circumstances, a United States person may be deemed to have a permanent establishment in the Russian Federation as a result of activities carried on in the Russian Federation through agents of the United States person. This summary does not address the treatment of those holders.
United States-Russia income tax treaty procedures
Under current rules, to claim the benefit of a reduced rate of withholding under the United States-Russia income tax treaty, anon-resident generally must provide official certification from the U.S. tax authorities of eligibility for the treaty benefits in the manner required by Russian law.
A U.S. holder may obtain the appropriate certification by mailing completed forms, together with the holder’s name, taxpayer identification number, the tax period for which certification is required, and other applicable information, to the U.S. Internal Revenue Service (the “IRS”). The procedures for obtaining certification are described in greater detail in the instructions to IRS Form 8802. As obtaining the required certification from the IRS may take at least six to eight weeks, U.S. holders should apply for such certification as soon as possible.
If tax is withheld by a Russian resident on dividends or other amounts at a rate different from that provided in the tax treaty, a U.S. holder may apply for a tax refund by filing a package of documents with the Russian
local tax inspectorate to which the withholding tax was remitted within three years from the withholding date for U.S. holders which are legal entities, and within one year from the withholding date for individual U.S. holders. The package should include confirmations of residence of the foreign holder (IRS Form 6166), a copy of the agreement or other documents substantiating the payment of income, documents confirming the beneficial
ownership of the dividends recipient and the transfer of tax to the budget. Under the provisions of the Russian Tax Code the refund of the tax should be effected within one month after the submission of the documents. However, procedures for processing such claims have not been clearly established, and there is significant uncertainty regarding the availability and timing of such refunds. Since 2020, the tax refund period may be different as determined by the results of a mutual agreement procedure in accordance with the international tax treaty of the Russian Federation.
Neither the depositary nor we will have any obligation to assist a U.S. holder of shares or ADSs with the completion and filing of any tax forms.
Stamp duty
No Russian stamp duty will be payable by the holders upon any of the transactions with the shares or ADSs discussed in this section (e.g., on a purchase or sale of the shares or ADSs), except for transactions involving the receipt of the shares or ADSs by way of inheritance.
Certain U.S. Federal Income Tax Considerations
The following is a summary of material U.S. federal income tax consequences of the purchase, ownership and disposition of shares or ADSs by a “U.S. Holder.” Solely for purposes of this “— Certain U.S. Federal Income Tax Considerations” section, a U.S. Holder is a beneficial owner of shares or ADSs that is, for U.S. federal income tax purposes: (1) an individual who is a citizen or resident of the United States, (2) a corporation created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (3) an estate the income of which is subject to U.S. federal income tax regardless of its source or (4) a trust, if a United States court can exercise primary supervision over the administration of the trust and one or more United States persons can control all substantial trust decisions, or if the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a United States person.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes is a beneficial owner of shares or ADSs, the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the activities of the partnership. A partner of a partnership holding shares or ADSs should consult its tax adviser regarding the associated tax consequences.
This summary does not discuss all aspects of U.S. federal income taxation that may be relevant to investors in light of their particular circumstances, such as investors subject to special tax rules (including, without limitation: (i) financial institutions; (ii) insurance companies; (iii) dealers in stocks, securities, or currencies or notional principal contracts; (iv) regulated investment companies; (v) real estate investment trusts;(vi) tax-exempt organizations; (vii) partnerships, pass-through entities, or persons that hold shares or ADSs through pass-through entities; (viii) holders that are not U.S. Holders; (ix) holders that own (directly, indirectly or constructively) 10% or more of our stock (by vote or value); (x) investors that hold shares or ADSs as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes; (xi) investors that have a functional currency other than the U.S. dollar; (xii) persons subject to special tax accounting rules as a result of any item of gross income with respect to the shares or ADSs being taken into account in an applicable financial statement; and (xiii) U.S. expatriates and former long-term residents of the United States), all of whom may be subject to tax rules that differ significantly from those summarized below. This summary does not address tax consequences applicable to holders of equity interests in a holder of the shares or ADSs, including, but not limited to, U.S. federal estate, gift or alternative minimum tax considerations, ornon-U.S., state or local tax considerations. This summary only addresses investors that will acquire shares or ADSs in an original offering, and it assumes that investors will hold their shares or ADSs as capital assets for U.S. federal income tax purposes (generally, property held for investment).
This summary is based upon current U.S. federal income tax law, including the U.S. Internal Revenue Code of 1986 (the “Code”), its legislative history, existing, temporary and proposed regulations thereunder, published
rulings and court decisions, all of which are subject to differing interpretation or change (possibly with retroactive effect), and the United States-Russia income tax treaty, which is subject to change, possibly with retroactive effect. We have not sought, and will not seek, any ruling from the IRS or any opinion of counsel with respect to the tax consequences discussed below, and we cannot provide assurance that the IRS will not take a position contrary to the tax consequences discussed below or that any position taken by the IRS would not be sustained.
Investors should consult their tax advisers as to the consequences under U.S. federal, estate, gift, state, local and applicablenon-U.S. tax laws of the purchase, ownership and disposition of shares or ADSs.
Ownership of ADSs in general
U.S. Holders of ADSs should generally be treated for U.S. federal income tax purposes as owners of the underlying shares represented by those ADSs, assuming the relevant deposit agreement and any related agreement include customary representations and obligations (particularly relating to anypre-release of ADSs) and such representations and obligations are properly complied with. In such case, except as noted, the U.S. federal income tax consequences discussed below should apply equally to U.S. Holders of ADSs and shares, and no gain or loss will be recognized upon an exchange of an ADS for the share represented by that ADS. A U.S. Holder’s tax basis in such shares will be the same as the U.S. Holder’s tax basis in such ADSs, and the holding period in such shares will include the holding period in such ADSs.
Taxation of dividends on shares or ADSs
Subject to the passive foreign investment company rules described below, for U.S. federal income tax purposes, the gross amount of a distribution, including any Russian withholding taxes, with respect to shares or ADSs will be treated as a taxable dividend to the extent of our current and accumulated earnings and profits, computed in accordance with U.S. federal income tax principles. Certain dividends received bynon-corporate U.S. Holders may be taxed at the lower applicable capital gains rate. This lower capital gains rate is only applicable to dividends paid by “qualified foreign corporations” (which term excludes PFICs, as defined below) and only with respect to shares or ADSs held for a minimum holding period (generally, 61 days during the121-day period beginning 60 days before theex-dividend date). A company will be a qualified foreign corporation if: (a) it is eligible for the benefits of an applicable United States income tax treaty; or (b) the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.Non-corporate U.S. Holders are strongly urged to consult their tax advisers as to the applicability of the lower capital gains rate to dividends received with respect to shares or ADSs. Distributions in excess of our current and accumulated earnings and profits will be applied against and will reduce a U.S. Holder’s tax basis in shares or ADSs and, to the extent in excess of such tax basis, will be treated as gain from a sale or exchange of such shares or ADSs and will be treated as described under “Taxation on sale or other taxable disposition of shares or ADSs” below. We do not currently and do not intend to calculate our earnings and profits for U.S. federal income tax purposes and, unless we make such calculations, U.S. Holders should expect that any distributions with respect to shares or ADSs generally will be reported to them as a dividend, even if that distribution would otherwise be treated as a return of capital or as a capital gain pursuant to the rules described above. Such dividends will not be eligible for the dividends received deduction allowed to corporations.
If a dividend distribution is paid in rubles, the amount includible in income will be the U.S. dollar value of the dividend, calculated using the exchange rate in effect on the date the dividend is received by the U.S. Holder (or the date of the depositary’s receipt in the case of the ADSs), regardless of whether the payment is actually converted into U.S. dollars on that date. Generally, any gain or loss resulting from currency exchange rate fluctuations during the period from the date the dividend is includible in the income of the U.S. Holder to the date the rubles are converted into U.S. dollars will be treated as U.S. source ordinary income or loss.
U.S. Holders may be required to recognize foreign currency gain or loss on the receipt of a refund of Russian withholding tax pursuant to the United States-Russia income tax treaty to the extent the U.S. dollar value of the refund differs from the U.S. dollar equivalent of that amount on the date of receipt of the underlying dividend.
Russian withholding tax under the United States-Russia income tax treaty should be treated as a foreign income tax that, subject to generally applicable limitations and conditions, is eligible for a U.S. foreign tax credit against the U.S. federal income tax liability of the U.S. Holder. If Russian tax is withheld at a rate in excess of the applicable rate under the United States-Russia income tax treaty for which a U.S. Holder qualifies, a U.S. foreign tax credit for the excess amount may not be allowed to be claimed.
For U.S. foreign tax credit purposes, a dividend distribution will be treated as foreign source income and will generally be classified as “passive category income.” Additionally, a U.S. Holder who does not elect to claim a foreign tax credit may instead be eligible to claim a deduction for U.S. federal income tax purposes in respect of Russian withholding tax, but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules relating to the determination of the U.S. foreign tax credit, or deduction in lieu of the U.S. foreign tax credit, are complex and U.S. Holders should consult their tax advisers with respect to those rules.
Taxation on sale or other taxable disposition of shares or ADSs
Subject to the passive foreign investment company rules described below, the sale or other taxable disposition of shares or ADSs will generally result in the recognition of gain or loss in an amount equal to the difference between the amount realized on the sale or other taxable disposition and the adjusted basis in such shares or ADSs. Such gain or loss generally will be treated as long-term capital gain or loss if the shares or ADSs have been held for more than one year as of the time of the sale or other taxable disposition. Capital gains ofnon-corporate U.S. Holders derived from capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to significant limitations.
Gain or loss realized on the sale or other disposition of shares or ADSs will generally be treated as U.S. source income and as a result any Russian taxes imposed upon such sale or other disposition may not be creditable against a U.S. Holder’s U.S. federal income tax liability. U.S. Holders are strongly urged to consult their tax advisers as to the availability of tax credits for any Russian taxes withheld on the sale or other disposition of shares or ADSs.
If a U.S. Holder receives any foreign currency on the sale or other taxable disposition of shares or ADSs, such U.S. Holder generally will realize an amount equal to the U.S. dollar value of such foreign currency on the settlement date of such sale or other taxable disposition if (1) such U.S. Holder is a cash basis or electing accrual basis taxpayer and the shares or ADSs are treated as being “traded on an established securities market” or (2) such settlement date is also the date of such sale or other taxable disposition. If the foreign currency so received is converted to U.S. dollars on the settlement date, such U.S. Holder should not recognize foreign currency gain or loss on such conversion. If the foreign currency so received is not converted into U.S. dollars on the settlement date, such U.S. Holder will have a basis in such foreign currency equal to its U.S. dollar value on the settlement date. Any gain or loss on a subsequent conversion or other taxable disposition of such foreign currency generally will be treated as ordinary income or loss to such U.S. Holder and generally will be income or loss from sources within the United States for U.S. foreign tax credit purposes. Each U.S. Holder should consult its tax adviser regarding the U.S. federal income tax consequences of receiving foreign currency from the sale or other disposition of shares or ADSs.
Passive foreign investment company status
Anon-U.S. company is a passive foreign investment company (“PFIC”) in any taxable year in which, after taking into account the income and assets of certain subsidiaries, either (1) at least 75% of its gross income is
passive income or (2) at least 50% of the average value of its assets (based on an average of the quarterly values of the assets) is attributable to assets that produce or are held to produce passive income. We believe that for U.S. federal income tax purposes, we were not a PFIC for the taxable year ending in 2017.2019. However, the PFIC determination is made annually and may involve facts that are not within our control. In addition, there are
special requirements that apply to income from the sale and ownership of commodities that need to be satisfied in order for amounts attributable to commodities to be treated asnon-passive. If we were classified as a PFIC at any time that you holda U.S. Holder holds our ADSs andor shares, yousuch holder may be subject to materially adverse U.S. federal income tax consequences compared to an investment in a company that is not considered a PFIC, including being subject to greater amounts of U.S. tax on distributions and gains on the sale or other taxable disposition of the ADSs and shares as well as being subject to additional U.S. tax filing requirements. Additionally, dividends paid by the company tonon-corporate U.S. holdersHolders would not be eligible for the special reduced rate of tax described above under “Taxation of dividends on shares or ADSs.” YouU.S. Holders should consult yourtheir tax advisers as to the consequences of an investment in a PFIC.
Information reporting and backup withholding
U.S. Holders may be subject to information and backup withholding on the payment of dividends on, and the proceeds received from the disposition of, shares or ADSs, unless: (1) the U.S. Holder is an exempt recipient, or (2) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against a U.S. Holder’s federal income tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the IRS and furnishing all required information. U.S. Holders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption, if applicable.
FATCA
Provisions under Sections 1471 through 1474 of the Code and applicable U.S. Treasury Regulations commonly referred to as “FATCA” generally impose 30% withholding on certain “withholdable payments” and, in the future, may impose such withholding on “foreign passthru payments” made by a “foreign financial institution” (each as defined in the Code) that has entered into an agreement with the IRS to perform certain diligence and reporting obligations with respect to the foreign financial institution’s U.S.-owned accounts. Prospective investors should consult their tax advisors regarding the potential impact of FATCA and anynon-U.S. legislation implementing FATCA on the investment in ADSs.
Documents on Display
The documents that are exhibits to or incorporated by reference in this document can be read at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at +1800-SEC-0330. These filings are also available at the website maintained by the SEC atwww.sec.gov. Our electronic filings are available at the SEC websitewww.sec.gov. Information about Mechel is also available on the Internet atwww.mechel.com. Information included in our website does not form part of this document.
Some of our reports and other information can also be inspected at the offices of the NYSE at 20 Broad Street, New York, New York 10005.
Glossary
Blast furnace: A towering cylinder lined with heat-resistant (refractory) bricks, used by integrated steel mills to smelt pig iron from ore. Its name comes from the “blast” of hot air and gases forced up through the iron ore, coke and fluxing additions that load the furnace.
Carbon steel: A type of steel generally having no specified minimum quantity of any alloying element and containing only an incidental amount of any element other than carbon, silicon, manganese, copper, sulfur and phosphorus.
CIF: Cost, Insurance and Freight, a commercial term pursuant to which the seller must pay the costs, insurance and freight necessary to bring the goods to the named port of destination but the risk of loss or damage to the goods, as well as any additional costs due to events occurring after the time of delivery, are transferred from the seller to the buyer.
Coils:Steel sheet that has been wound. A slab, once rolled in ahot-strip mill, can be more than one mile long; coils are the most efficient way to store and transport sheet steel.
Continuous casting: A method of pouring steel directly from a ladle through a tundish into a special machine shaped to form billets and slabs. Continuous casting avoids the need for blooming mills for rolling billets into slabs. Continuous cast metal solidifies in a few minutes, versus several hours for an ingot. As a result of this, the chemical composition and mechanical properties of billets are more uniform.
FCA: Free Carrier, a commercial term pursuant to which the seller must deliver the goods, cleared for export, to the carrier nominated by the buyer at the named place. Costs for transportation and risk of loss transfer to the buyer after delivery to the carrier.
Flat-rolled steel/Flat products: Category of steel that includes sheet and strip, among others.
FOB: Free on Board, a commercial term pursuant to which the buyer bears all costs and risks of loss of or damage to the goods from the point the goods pass the ship’s rail at the named point of shipment.
Galvanized steel: Steel coated with a layer of zinc to provide corrosion resistance in underbody auto parts, garbage cans, storage tanks, fencing wire, etc. Sheet steel normally must be cold-rolled prior to galvanizing. Galvanized steel is subdivided intohot-dipped galvanized and electrogalvanized steel.
Hot-rolled:Section that is sold in its“as-produced” state off the hot mill with no additional treatment, aside from being pickled and oiled (if specified).
Magnetic separator: A device used in a process when magnetically susceptible mineral is separated from gangue minerals by applying a strong magnetic field.
Pipes:Tubes used to transport fluids or gases. Pipe and tube are often used interchangeably, with a given label applied primarily as a matter of historical use.
Probable reserves: In accordance with the JORC Code, those reserves which are the economically mineable part of the indicated mineral resources. Indicated reserves include all minerals conforming to the thickness and depth limits defined in the resource base, and for which known data points are not more than 2,000 meters apart.
Proved reserves: In accordance with the JORC Code, those reserves which are the economically mineable part of the measured mineral resources. Measured mineral resources means the tonnages ofin-situ minerals contained in seams or sections of seams for which sufficient information is available to enable detailed or conceptual mine planning.
Raw steel: Steel in primary form of hot molten metal.
Rebar or Reinforcement bars: Round rolled products of plain ordie-rolled sections of various types and classes used to strengthen concrete in highway and building construction.
Reserve: In accordance with the JORC Code, virgin and/or accessed parts of a mineral resource base, which could be economically extracted or produced at the time of determination, considering environmental, legal and technological constraints.
Rolled steel (products): Steel with certain forms and geometric dimensions manufactured by drafting metal between rotary rolls of rolling mills.
Run-of-mine, or ROM, coal: Coal that has not undergone the processes of classification and washing.
Saleable coal: Coal that has undergone the processes of classification and washing.
Scrap (Ferrous): Ferrous (iron-containing) material that generally is remelted and recast into new steel in EAFs. Integrated steel mills also use scrap metal for up to 25% of their basic oxygen furnace charge. Scrap metal includes waste steel generated from within metal-processing plants and steel mills through edge trimming and rejects.
Sections:Blooms or billets that arehot-rolled in a rolling mill to manufacture rounds, squares, bands, among other structural shapes, “L,” “U,” “T” or “I” shapes. Sections can also be produced by welding together pieces of flat products. Sections can be used for a wide variety of purposes in the construction, engineering and transport industries.
Semi-finished steel: Steel shapes (for example, blooms, billets or slabs) that later are rolled into finished products such as beams, bars or sheet.
Sheet steel: Thin, flat-rolled steel created in ahot-strip mill by rolling a cast slab flat while maintaining the side dimensions. The malleable steel lengthens to several thousand feet as it is squeezed by the rolling mill. The most common differences among steel bars, strip, plate and sheet are merely their physical dimensions of width and gauge (thickness).
Sintering:A process that combines iron-bearing particles into small chunks. Initially, these materials are too fine to withstand the air currents of the smelting process in the blast furnace and could be thrown away. The iron is now conserved in sinter as the chunks of sinter are heavier and therefore can be charged into the blast furnace.
Slab:The most common type of semi-finished steel. Traditional slabs measure13-35 centimeters thick,75-300 centimeters wide and are usually about6-12 meters long, while the output of the recently developed “thin slab” casters is approximately five centimeters thick. After casting, slabs are sent to thehot-strip mill to be rolled into coiled sheet and plate products.
Special steel: Alloyed steel produced by the addition of various metals (e.g., manganese) in small quantities during the steel-makingsteelmaking process to improve mechanical properties such as strength and resistance to stress. Special steels are intermediary products between standard steel grades and stainless steel alloys (with a high content of nickel and chrome). Special steel products are typically used as long products (e.g., special bar quality, bearing steel, tool steel and high-speed steel).
Tailings:Material rejected from a mine after the valuable minerals have been recovered.
Welded mesh: Cold-rolled or drawn wire cuts of certain length welded together at specified distances in longitudinal and traverse directions into sheets of rectangular shapes.
Wire rod: Round, semi-finished steel that is rolled from a billet and coiled for further processing. Wire rod is commonly drawn into wire or used to tie bundles. Wire rod rolling mills (rolling facilities) can run as fast as 6,000 meters per minute.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, our financial position is routinely subject to a variety of risks. We are exposed to market risks associated with foreign currency exchange rates, interest rates and commodity prices. We are also subject to the risks associated with the business environment in which we operate, including the collectibilitycollectability of accounts receivable.
We do not enter into hedging transactions to manage the risks specified above.
We do not hold or issue derivative financial instruments for trading purposes.
See notes 3 and 10.2 to the consolidated financial statements for more information on foreign currency translations, derivative financial instruments, market risks and risk management.
Currency Risk
The functional currencies for our main Russian and European subsidiaries are the Russian ruble and euro, respectively. The U.S. dollar is the functional currency of our other main international operations. Our reporting currency is the Russian ruble.
In the past we entered into forward transactions to buy U.S. dollars for euros to hedge our exposure to movements in foreign currency exchange rates arising in relation to euro-denominated accounts receivable of our trading subsidiaries. These derivatives were not designated as hedging contracts for accounting purposes. As of December 31, 2017,2019, we did not have any forward transactions.
We are exposed to movements in the U.S. dollar and euro exchange rates relative to the Russian ruble, our reporting currency. The following table sets forthFor a description of exchange rates, our monetary assetstransactions and liabilities bybalances exposed to foreign currency as of December 31, 2017.risk and sensitivity analysis, please see notes 3(g) and 10.2 to the consolidated financial statements.
| U.S. Dollar | Euro | |||||||
| (In millions of Russian rubles) | ||||||||
Non-current assets | — | — | ||||||
Long-term financial assets | — | — | ||||||
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Current assets | 829 | 746 | ||||||
Receivables | 111 | 711 | ||||||
Shor-term financial assets | — | — | ||||||
Cash and cash equivalents | 718 | 35 | ||||||
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Long-term liabilities | — | (88 | ) | |||||
Long-term loans and borrowings | — | — | ||||||
Long-term payables | — | — | ||||||
Long-term finance lease liability | — | (88 | ) | |||||
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Short-term liabilities | (118,677 | ) | (27,399 | ) | ||||
Short-term loans and borrowings | (112,277 | ) | (25,304 | ) | ||||
Short-term payables | (5,614 | ) | (2,064 | ) | ||||
Short-term finance lease liability | (786 | ) | (31 | ) | ||||
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Interest Rate Risk
Interest rate risk is the risk that changes in floating interest rates will adversely impact our financial results. As of December 31, 2017, 20162019, 2018 and 2015,2017, the shares of the borrowings with floating rates in the total amount of the borrowings were 97% (including MosPrime — 0%, the CBR key rate — 65%, LIBOR, EURIBOR and others — 32%), 95% (including MosPrime — 0%, the CBR key rate — 62%, LIBOR, EURIBOR and others — 33%) and 95% (including MosPrime — 0.03%, the CBR key rate — 66%, LIBOR, EURIBOR and others — 29%), 91% (including MosPrime — 0.1%, the CBR key rate — 62%, LIBOR, EURIBOR and others — 29%) and 53% (including MosPrime — 0.2%, the CBR key rate — 14%, LIBOR, EURIBOR and others — 39%), respectively.
We have not entered into transactions designed to hedge against interest rate risks, which may exist in connection with our current or future indebtedness. We monitor the market and assess our options for hedging interest rate risks and may enter into such arrangements in the future.
We manage interest rate risk through analysis of current interest rates. If there are significant changes in market interest rates management may consider refinancing of a particular financial instrument on more favorable terms.
The table below demonstratesSee notes 10.1 and 10.2 to the consolidated financial statements for information on our outstanding debt, interest rates and scheduled maturities of the outstanding debt, as well as our sensitivity to the change of floating rates which management believes is an appropriate measure of the current market conditions.rates.
| Increase/decrease in MosPrime and the CBR key rate (%) | Effect on profit before tax (In millions of Russian rubles) | Increase/decrease in LIBOR (%) | Effect on profit before tax (In millions of Russian rubles) | Increase/decrease in EURIBOR (%) | Effect on profit before tax (In millions of Russian rubles) | |||||||||||||||||||
2015 | ||||||||||||||||||||||||
| +6 | % | 3,312 | +0.5 | % | 662 | +0.25 | % | 62 | ||||||||||||||||
| –5 | % | (2,760 | ) | –0.12 | % | (159 | ) | –0.25 | % | (62 | ) | |||||||||||||
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2016 | ||||||||||||||||||||||||
| +2 | % | 4,943 | +0.6 | % | 736 | +0.12 | % | 28 | ||||||||||||||||
| –4 | % | (9,887 | ) | –0.08 | % | (98 | ) | –0.08 | % | (19 | ) | |||||||||||||
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2017 | ||||||||||||||||||||||||
| +1 | % | 2,744 | +0.48 | % | 500 | +0.04 | % | 8 | ||||||||||||||||
| –2 | % | (5,488 | ) | –0.24 | % | (250 | ) | –0.08 | % | (16 | ) | |||||||||||||
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Commodity Price Risk
In the normal course of our business, we are primarily exposed to market risk of price fluctuations related to the purchase, production and sale of steel products, coal, coke and other products.
We do not use commodity derivatives or long-term fixed-price sales contracts to manage our commodity price risks.
Equity Price Risk
We also have minor investments in shares of Russian companies that are not publicly traded and, accordingly, their market values are not available. We consider that it is not practicable for us to estimate the fair values of these investments because we have not yet obtained or developed the valuation models necessary to
make the estimates, and the cost of obtaining an independent valuation is believed by management to be excessive considering the significance of the investments. Accordingly, these investments are omitted from the risk information disclosure presented herein.
We do not use derivative instruments or any other arrangements to manage our equity price risks.
Item 12. Description of Securities Other than Equity Securities
Depositary Fees and Charges
Our common American Depositary Shares, or common ADSs, each representing two common shares, are traded on the NYSE under the symbol “MTL.” The common ADSs are evidenced by common American Depositary Receipts, or common ADRs, issued by Deutsche Bank Trust Company Americas as depositary (“DBTCA”), as depositary under the Deposit Agreement, dated as of July 27, 2004, among Mechel PAO, Deutsche Bank
Trust Company Americas,DBTCA, and holders and beneficial owners of common ADSs, as amended on May 21, 2007, May 19, 2008 and December 21, 2015. Common ADS holders are required to pay the following service fees to DBTCA:
Service | Fees (In U.S. dollars) | |||
Issuance of common ADSs | Up to $0.05 per common ADS | |||
Cancellation of common ADSs | Up to $0.05 per common ADS | |||
Distribution of cash dividends or other cash distributions | Up to $0.02 per common ADS | |||
Distribution of common ADSs pursuant to (1) stock dividends, free stock distributions or (2) exercises of rights to purchase additional common ADSs or distribution of proceeds thereof | Up to $0.05 per common ADS | |||
Distribution of securities other than common ADSs or rights to purchase additional common ADSs or the distribution of proceeds thereof | Up to $0.05 per common ADS | |||
Common ADR transfer, combination orsplit-up fee | $1.50 per transfer | |||
Share register inspection annual fee | $0.01 per common ADS | |||
Operation and maintenance annual fee | $0.02 per common ADS* |
| * | This fee, when combined with the fees for cash distributions, shall not exceed $0.02 per common ADS per year. |
Our preferred American Depositary Shares, or preferred ADSs, each representingone-half of a preferred share, are traded on the NYSE under the symbol “MTL PR.” The preferred ADSs are evidenced by preferred American Depositary Receipts, or preferred ADRs, issued by DBTCA under the Deposit Agreement, dated as of May 12, 2010, among Mechel PAO, Deutsche Bank Trust Company Americas,DBTCA, and holders and beneficial owners of preferred ADSs. Preferred ADS holders are required to pay the following service fees to DBTCA:
Service | Fees (In U.S. dollars) | |||
Issuance of preferred ADSs | Up to $0.05 per preferred ADS | |||
Cancellation of preferred ADSs | Up to $0.05 per preferred ADS | |||
Distribution of cash dividends or other cash distributions | Up to $0.02 per preferred ADS | |||
Distribution of preferred ADSs pursuant to (1) stock dividends, free stock distributions or (2) exercises of rights to purchase additional preferred ADSs or distribution of proceeds thereof | Up to $0.05 per preferred ADS | |||
Distribution of securities other than preferred ADSs or rights to purchase additional preferred ADSs or the distribution of proceeds thereof | Up to $0.05 per preferred ADS |
Service | Fees (In U.S. dollars) | |||
Preferred ADR transfer, combination orsplit-up fee | $1.50 per transfer | |||
Share register inspection annual fee | $0.01 per preferred ADS | |||
Operation and maintenance annual fee | $0.02 per preferred ADS* |
| * | This fee, when combined with the fees for cash distributions, shall not exceed $0.02 per preferred ADS per year. |
In addition, holders of ADSs may also be charged for the following expenses: (1) taxes and governmental charges; (2) cable, telex and facsimile transmission and delivery charges; (3) transfer or registration fees of the Russian share registrar; (4) fees or charges of DBTCA for conversion of foreign currency into U.S. dollars; and (5) expenses of DBTCA in connection with the issuance of definitive certificates.
Holders of ADSs are responsible for any taxes or other governmental charges payable on their ADSs or on the deposited securities underlying the ADSs. DBTCA may refuse to transfer the ADSs or to allow holders to withdraw the deposited securities underlying their ADSs until such payment is made, or it may deduct the amount of taxes owed from any payments to ADS holders. It may also sell deposited securities, by public or private sale, to pay any taxes owed. ADS holders will remain liable if the proceeds of the sale are not enough to pay the taxes. If DBTCA sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect
the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.
Depositary Payments for 2017, 20162019, 2018 and 20152017
In consideration for its appointment as depositary, DBTCA agreed to reimburse us for costs of the maintenance of our ADS programs and ofADS-programs related investor relations activities. For the years ended December 31, 20162019, 2018 and 2015,2017, DBTCA reimbursed us $826 thousandapproximately $745,198, $402,816 and $1.8 million,$434,774, respectively, in regard to our commonADS-program. We have not yet received reimbursement in regard to our commonADS-program for the year ended December 31, 2017. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, DBTCA reimbursed us $121 thousand, $234 thousandapproximately $399,954, $378,975 and $419 thousand,$121,001, respectively, in regard to our preferredADS-program.
In addition, for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, DBTCA made the following payments on our behalf in relation to our ADS programs:
| Payment (In U.S. dollars) For the Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||||
Category | 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
| (In U.S. dollars) | ||||||||||||||||||||||||
NYSE listing fees | 93,146 | 150,189 | 91,888 | 88,854 | 85,037 | 93,146 | ||||||||||||||||||
Proxy solicitation expenses | — | 178,010 | — | |||||||||||||||||||||
ADS holder identification expenses | 18,000 | 9,000 | — | — | — | 18,000 | ||||||||||||||||||
Full targeting project | — | — | — | |||||||||||||||||||||
Perception study | — | — | — | |||||||||||||||||||||
BD corporate | — | — | 11,000 | |||||||||||||||||||||
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Total | 111,146 | 337,199 | 102,888 | 88,854 | 85,037 | 111,146 | ||||||||||||||||||
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In addition, DBTCA waived the cost of various ADR program-related support services that it provided to us in 2017, 20162019, 2018 and 2015.2017. DBTCA had valued these services at $412,500up to $362,500 per annum for common ADSs when DBTCA wasre-appointed in 20142020 and at $160,000 per annum for preferred ADSs when DBTCA was appointed in 2015. The volume of the costs that DBTCA agrees to waive may vary depending on the depositary receipt program size within particular year. Under certain circumstances, including early termination of the appointment of DBTCA, we would be required to repay to DBTCA some or all of the payments made to us or on our behalf (including fees waived by it) since its appointment.
PART II
Item 13.Defaults, Dividend Arrearages and Delinquencies
As of April 5, 2018,March 19, 2020, we did not pay in full amounts due in respect of principal and interest under certain of our loan agreements and several of our leaseexport credit facility agreements and were in breach of certaina number of financial andnon-financial covenants under our credit facilities. See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Restrictive Covenants” andCovenants,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — Our creditors had accelerated and in the future may accelerate amounts due under our loan agreements due to our failure to comply with theour payment and other obligations, in our credit facilities caused some of our creditors to accelerate amounts due under their loan agreements and such failure, or like failure in the future, may cause the acceleration of our other outstanding debt, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — If we areWe may be unable to restructure all of our indebtedness or we may fail to comply with the new terms of the restructured indebtedness, our lenders may claim for accelerated repayment, which could lead to cross-default under other borrowings and have a material adverse effect on our business, financial condition, results of operations and prospects,” “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — We have a substantial amount of outstanding indebtedness with restrictive financial covenants and most shares and assets in our subsidiaries are pledged” and “Item 3. Key Information — Risk Factors — Risks Relating to Our Financial Condition and Financial Reporting — If we fail to fulfill payment obligations under the group’s lease agreements, our lessors may require the return of the leased assets, which could materially adversely affect our business, financial condition, results of operations and prospects.”
The table below summarizes the payment defaults, cross-defaults and other covenant breaches under our main facility agreements:
| Non-payment of principal or interest (yes/no) | Cross-default (yes/no) | Breach of financial covenants(1) (yes/no) | Breach of non- financial covenants(1) (yes/no) | |||||||||||||
VTB Bank | no | yes | ||||||||||||||
| yes | yes | ||||||||||||||
Gazprombank | no | yes | ||||||||||||||
| yes | yes | ||||||||||||||
Universal Rolling Mill Facility Agreement | yes | yes | yes | yes | ||||||||||||
Other(2) | yes | yes | yes | yes | ||||||||||||
| (1) | The breaches provided in this table are as of December 31, |
| (2) | Includes |
The failure to pay the scheduled principal and interest amounts, as well as the breach of financial and other covenants in our loan agreements, which were not remedied by us or waived by our creditors, permit the creditors under those loan agreements to accelerate the payment of principal and interest under those loan agreements, as well as trigger cross-default provisions under a number of other facilities, permitting the respective lenders under such other facilities to accelerate the payment of principal and interest under their loans.
The failure to pay amounts due, thenon-compliance with financial andnon-financial covenants and the triggering of the cross-default provisions resulted in the reclassification of our group’s long-term debt intoshort-term liabilities in the amount of RUB 284,156220,046 million as of December 31, 2017.2019. In addition, cross-default provisions resulted in the reclassification of the long-term finance lease liability of RUB 3,8985,480 million into short-term finance lease liabilities as of December 31, 2017.2019.
Payment Defaults
The sections below summarize details of payment defaults under our main credit facilities, including principal amounts outstanding as of April 5, 2018, as well as briefly describe outstanding amounts under certain lease agreements with respect to which we have failed to meet payment obligations. Figures included in these sections are subject to change, including as a result of reconciliation with creditors, changes in exchange rates, additional charges invoiced, default interest and/or other penalty accruals, ongoing restructuring negotiations or any present or future proceedings (including litigations and arbitrations described in “Item 8. Financial Information — Litigation — Debt litigation”) related to our indebtedness or to our restructuring plans. Consequently, the figures stated herein do not constitute an acknowledgement of any obligation on our part to pay such amounts.
As of April 5, 2018,March 19, 2020, the total amount in default for failure to pay principal or interest under our export credit facilities and several of our leasefacility agreements was approximately 83.4 billion rubles.RUB 34.4 billion. Conversion from U.S. dollars and euros into rubles is made using the CBR exchange rate on April 5, 2018.March 19, 2020. The amounts provided below do not include various fines, surcharges and penalty fees, unless otherwise noted.
Pre-Export Facilities from a Syndicate of Banks
Pre-Export Facility Agreements for Yakutugol and Southern Kuzbass Coal Company from a syndicate of banks coordinated by ING Bank N.V., Société Générale and VTB Capital Plc — the principal amount outstanding was $1.0 billion (approximately 58.0 billion rubles), including overdue principal in the amount of $1.0 billion (approximately 58.0 billion rubles). In addition, the amount of overdue interest, including default interest, was $198.5 million (approximately 11.5 billion rubles).
Universal Rolling Mill Facility Agreement
Facility Agreement for Chelyabinsk Metallurgical Plant from BNP Paribas, Gazprombank and UniCredit — the—the principal amount outstanding was $154.9 million and €154.7 million (in aggregate approximately 19.925.1 billion rubles), including overdue principal in the amount of $112.6$154.9 million and €88.4€132.6 million (in aggregate approximately 12.823.2 billion rubles). In addition, the amount of overdue interest was $14.5$11.8 million and €3.3€2.7 million (in aggregate approximately 1.1 billion rubles).
Leasing
All overdue debt under our lease agreements amounted to 55.6 million rubles, including overdue lease payments to Caterpillar Financial OOO in the amount of $883.0 thousand (approximately 51.0 million rubles).
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15. Controls and Procedures
| (a) | Disclosure Controls and Procedures |
As required by paragraph (b) ofRules 13a-15f13a-15 and15d-15f15d-15 under the Securities Exchange Act of 1934, management has evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and other procedures designed to ensure that information
required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding our required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures.
Based on the evaluation of our disclosure controls and procedures in place as of December 31, 2017,2019, our controls and procedures were recognized effective.
| (b) | Management’s Annual Report on Internal Control over Financial Reporting |
Management is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting refers to a process designed by, or under the supervision of, our chief executive officer and chief financial officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS, and includes those policies and procedures that:
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and members of our Board of Directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process, and it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 20172019 using the framework set forth in the report of the Treadway Commission’s Committee of Sponsoring Organizations (COSO)(“COSO”), “Internal Control — Integrated Framework” (2013). Based on the assessment, our management believes our company maintained effective internal control over financial reporting as of December 31, 2017.2019.
Ernst & Young LLC, an independent registered public accounting firm, has audited our consolidated financial statements and has also issued an attestation report on the effectiveness of our internal controls over financial reporting as of December 31, 2017,2019, a copy of which appears below.
| (c) | Report of Independent Registered Public Accounting Firm |
To the Shareholders and the Board of Directors of Mechel PAO
Opinion on Internal Control over Financial Reporting
We have audited Mechel PAO and subsidiaries’ (hereinafter referred to as the “GroupCompany”) internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission “(2013(2013 framework),” (the COSO criteria). In our opinion, the GroupCompany maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial position of the GroupCompany as of December 31, 20172019 and 2016,2018, and the related consolidated statements of profit (loss) and other comprehensive income, (loss), changes in equity, and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes, and our report dated April 5, 2018March 19, 2020 expressed an unqualified opinion thereon that included an explanatory paragraph regarding the Group’sCompany’s ability to continue as a going concern.
Basis for Opinion
The Group’sCompany’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the GroupCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLC
Moscow, Russia
April 5, 2018March 19, 2020
| (d) | Changes in Internal Control over Financial Reporting |
We undertook the following efforts in 2017 to address the material weakness, identified by us in 2016, that we have determined to be a material change in our internal control over financial reporting.
We failed to operate effective controls over the IFRS financial statements close process.
In order to remediate this material weakness, we have performed the following actions:
Except for the remediation efforts undertaken as described above, thereThere have been no material changes in our internal control over financial reporting identified in the evaluation required by paragraph (d) ofRule 13a-15 orRule 15d-15 of the Exchange Act that occurred during the period covered by this annual report that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Item 16A.Audit Committee Financial Expert
Our Board of Directors has determined that Georgy Petrov, Chairman of our Audit Committee, is an “audit committee financial expert.” Mr. Petrov is independent in accordance with SECRule 10A-3. For a description of Mr. Petrov’s experience, see “Item 6. Directors, Senior Management and Employees — Directors and Executive Officers.”
We have adopted a code of business conduct and ethics that applies to our directors, officers and employees. It is available atwww.mechel.comandwww.mechel.ru. Hard copies of our code of business conduct and ethics are available free of charge to any person upon request. In order to request a hard copy, please send an inquiry toir@mechel.comindicating postal address to which the hard copies should be sent and a contact person. No amendments were made to our code of business conduct and ethics in 2017.2019.
report onForm 20-F. The following table presents the aggregate fees for professional services and other services rendered by Ernst & Young LLC in 20172019 and 2016,2018, respectively.
| Year Ended December 31, | Year Ended December 31, | |||||||||||||||
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
| (In millions of Russian rubles, net of VAT) | (In millions of Russian rubles, net of VAT) | |||||||||||||||
Audit Fees | 120.0 | 128.4 | 136.8 | 125.0 | ||||||||||||
Audit-related Fees | 0.4 | 2.8 | 0.7 | 0.7 | ||||||||||||
Tax Fees | 0.8 | 0.6 | — | 0.2 | ||||||||||||
Other Fees | — | — | 5.0 | 0.1 | ||||||||||||
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Total | 121.2 | 131.8 | 142.5 | 126.0 | ||||||||||||
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Audit Fees
The amount of audit fees includes fees necessary to perform an audit or interim review in accordance with the standards of the Public Company Accounting Oversight Board (United States) and services that generally only the independent auditor can reasonably provide, such as comfort letters, statutory audits, attestation services and consents and assistance with, and review of, documents filed with the SEC.
Audit-related Fees
This category usually includes assurance and related services that are typically performed by the independent auditor. More specifically, these services could include, among others, employee benefit plan audits,IT-related audits, consultation concerning financial accounting and reporting standards.
Tax Fees
Tax services include, among others, tax consultation related to proposed and consummated transactions, restructuring, personal taxation and general tax consultation.
Other Fees
Other fees include subscription, consultancy and training fees.
Audit CommitteePre-Approval Policies and Procedures
The Sarbanes-Oxley Act of 2002 required that we implement apre-approval process for all engagements with our independent public accountants. In compliance with Sarbanes-Oxley requirements pertaining to auditor independence, our Audit Committeepre-approves the engagement terms and fees of Ernst & Young LLC for all audit andnon-audit services, including tax services. All audit, audit-related and tax services rendered by Ernst & Young LLC in 20172019 were approved by the Audit Committee before Ernst & Young LLC was engaged for such services. No services of any kind were approved pursuant to a waiver permitted pursuant to 17 CFR210.2-01(c)(7)(i)(C).
Item 16D.Exemptions from the Listing Standards for Audit Committees
None.
In December 2019, Skyblock Limited, an affiliated company, acquired 1,018,996 common shares (state registration number of issue1-01-55005-E in Mechel PAO) in the course of trading sessions on the Moscow Exchange; the average market price paid per one common share amounted to RUB 61.88. The amount of acquired common shares represents approximately 0.24% of our voting shares.
Period | Total Number of Common Shares Purchased | Average Price Paid per Common Share | ||||||
From December 20, 2019 to December 30, 2019 | 1,018,996 | RUB 61.88 | ||||||
Item 16F.Change in Registrant’sRegistrant’s Certifying Accountant
Not applicable.
The NYSE permits us to follow certain home country corporate governance practices, which differ from those required for U.S. companies under the NYSE Listed Company Manual. The following table sets forth the most important differences between the NYSE corporate governance requirements for U.S. companies under the NYSE Listed Company Manual Section 303A and our current practices.
NYSE Corporate Governance Rules for U.S. Companies | Our Corporate Governance Practices | |
| A majority of directors must be independent, as determined by the board. (Section 303A.01 and 02). | We comply with this requirement, although it is not required for foreign private issuers like Mechel. | |
| Non-management directors must meet at regularly scheduled executive sessions without management. (Section 303A.03). | Our Bylaw on the Board of Directors, which is posted in the “Corporate Governance” section of our corporate website, provides that before each meeting of the board of directors, independent directors shall hold a consultation in the absence of management. | |
| Listed companies must have a nominating/corporate governance and a compensation committee, each composed entirely of independent directors and having a written charter specifying the committee’s purpose and responsibilities, as well as annual performance evaluation of the committee. (Section 303A.04 and 05). | We have a Committee on Appointments and Remuneration, which has | |
| Listed companies must have an audit committee that satisfies the requirements ofRule 10A-3 under the Exchange Act. (Section 303A.06). | We comply with this requirement. | |
| Audit committee must have a minimum of three members and have a written charter specifying the committee’s purpose, an annual performance evaluation and its duties and responsibilities. (Section 303A.07(a) and(b)). | Our Audit Committee has three members. The Bylaw on the Audit Committee of the Board of Directors is posted in the “Corporate Governance” section of our corporate website. | |
| Listed companies must have an internal audit function. (Section 303A.07(c)). | We have an Internal Audit Department. The summary of the Bylaw on the Internal Audit Department is posted in the “Corporate Governance” section of our corporate website. | |
| Shareholders must be given the opportunity to vote on all equity compensation plans and material revisions thereto. (Section 303A.08). | As a Russian company, we are subject to the mandatory requirements of the Russian Joint-Stock Companies Law. The items on which shareholders can vote cannot be altered. | |
| Listed companies must adopt and disclose corporate governance guidelines. (Section 303A.09). | Our corporate governance guidelines are reflected in our various corporate documents, such as the Bylaw on the Board of Directors and the Code of Corporate Governance, all of which are posted in the “Corporate Governance” section of our website. | |
| Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. (Section 303A.10). | Our Code of Business Conduct and Ethics is posted in the “Corporate Governance” section of our website. | |
PART III
See instead “Item 18. Financial Statements.”
The following financial statements, together with the report of Ernst & Young LLC, are filed as part of this annual report onForm 20-F.
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
Consolidated Statement of Financial Position as of December 31, | F-6 | |||
| F-7 | ||||
| F-10 | ||||
| F-12 | ||||
Exhibit No. | Description | |
| 12.2 | Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 13.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 13.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | The following financial information formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statement of Profit (Loss) and Other Comprehensive Income | |
We hereby agree to furnish to the Securities and Exchange Commission, upon its request, copies of any instruments defining the rights of holders of long-term debt issued by Mechel or any of its consolidated subsidiaries.
The registrant hereby certifies that it meets all of the requirements for filing onForm 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
By: | /s/ OLEG V. KORZHOV | |||
| Name: Oleg V. Korzhov | ||||
| Title:Chief Executive Officer | ||||
Date: April 5, 2018March 19, 2020
CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
| F-3 | ||||
| F-4 | ||||
CONSOLIDATED STATEMENTOF FINANCIAL POSITIONASOF DECEMBER 31, | F-6 | |||
| F-7 | ||||
| F-10 | ||||
| F-12 | ||||
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors and Shareholders of
Mechel PAO
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Mechel PAO, a public joint stock company and subsidiaries (hereinafter referred to as the “Group”)(the Company) as of December 31, 20172019 and 2016,2018, and the related consolidated statements of profit (loss) and other comprehensive income, (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes (collectively referred to as the “consolidated financial statements”statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group atCompany as of December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Group’sCompany’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated April 5, 2018March 19, 2020 expressed an unqualified opinion thereon.
The Group’sCompany’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the GroupCompany will continue as a going concern. As discussed in Note 4 to the consolidated financial statements, the GroupCompany has significant debt that it does not have the ability to repay without its refinancing or restructuring, and has not complied with certain covenants of its major loan agreements with banks and has stated that substantial doubt exists about the Group’sCompany’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans in regard toregarding these matters are also described in Note 4 to the consolidated financial statements.4. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Group’sCompany’s management. Our responsibility is to express an opinion on thesethe Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)PCAOB and are required to be independent with respect to the GroupCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includeincluded examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLC
We have served as the Group’sCompany’s auditor since 2003.
Moscow, Russia
April 5, 2018March 19, 2020
MECHEL PAO
CONSOLIDATED STATEMENT OF PROFIT (LOSS) AND
OTHER COMPREHENSIVE INCOME (LOSS)
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Notes | Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2015 | Notes | Year ended December 31, 2019 | Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||||||||||||||||||||
Continuing operations | ||||||||||||||||||||||||||||||||
Revenue | 26 | 299,113 | 276,009 | 253,141 | ||||||||||||||||||||||||||||
Revenue from contracts with customers | 25 | 296,567 | 312,574 | 299,113 | ||||||||||||||||||||||||||||
Cost of sales | (160,356 | ) | (146,322 | ) | (151,334 | ) | (187,857 | ) | (177,756 | ) | (160,356 | ) | ||||||||||||||||||||
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| |||||||||||||||||||||||||||
Gross profit | 26 | 138,757 | 129,687 | 101,807 | 25 | 108,710 | 134,818 | 138,757 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Selling and distribution expenses | (55,686 | ) | (56,233 | ) | (51,117 | ) | (54,320 | ) | (54,988 | ) | (55,686 | ) | ||||||||||||||||||||
Loss onwrite-off ofnon-current assets | (321 | ) | (1,953 | ) | (691 | ) | ||||||||||||||||||||||||||
Impairment of goodwill and othernon-current assets | 18 | (6,081 | ) | (5,202 | ) | (1,460 | ) | |||||||||||||||||||||||||
Provision for doubtful accounts | 13 | (332 | ) | (758 | ) | (1,507 | ) | |||||||||||||||||||||||||
Impairment of goodwill and othernon-current assets, net | 17 | (1,804 | ) | (7,222 | ) | (6,081 | ) | |||||||||||||||||||||||||
Allowance for expected credit losses on financial assets | 12, 14 | (235 | ) | (940 | ) | (332 | ) | |||||||||||||||||||||||||
Taxes other than income taxes | (4,967 | ) | (5,913 | ) | (5,853 | ) | (5,282 | ) | (4,834 | ) | (4,967 | ) | ||||||||||||||||||||
Administrative and other operating expenses | 25.1 | (15,590 | ) | (18,791 | ) | (17,300 | ) | 24.1 | (16,316 | ) | (18,765 | ) | (15,911 | ) | ||||||||||||||||||
Other operating income | 25.3 | 1,387 | 1,853 | 373 | 24.3 | 745 | 1,711 | 1,387 | ||||||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Total selling, distribution and operating income and (expenses), net | (81,590 | ) | (86,997 | ) | (77,555 | ) | (77,212 | ) | (85,038 | ) | (81,590 | ) | ||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||||||||||
Operating profit | 57,167 | 42,690 | 24,252 | 31,498 | 49,780 | 57,167 | ||||||||||||||||||||||||||
|
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|
|
|
| |||||||||||||||||||||||||||
Finance income | 25.4 | 633 | 1,176 | 183 | 24.4 | 600 | 34,056 | 633 | ||||||||||||||||||||||||
Finance costs including fines and penalties on overdue loans and borrowings and finance leases payments of RUB 1,161 million, RUB 6,013 million and RUB 19,167 million for the periods ended December 31, 2017, 2016 and 2015, respectively | 25.5 | (47,610 | ) | (54,240 | ) | (60,452 | ) | |||||||||||||||||||||||||
Finance costs including fines and penalties on overdue loans and borrowings and lease payments | 24.4 | (38,830 | ) | (42,052 | ) | (47,610 | ) | |||||||||||||||||||||||||
Foreign exchange gain (loss), net | 4,237 | 25,947 | (71,106 | ) | 19,241 | (25,775 | ) | 4,237 | ||||||||||||||||||||||||
Share of profit (loss) of associates, net | 8 | 18 | (17 | ) | — | |||||||||||||||||||||||||||
Share of profit of associates, net | 7 | 28 | 10 | 18 | ||||||||||||||||||||||||||||
Other income | 25.6 | 1,495 | 598 | 342 | 24.5 | 239 | 512 | 1,495 | ||||||||||||||||||||||||
Other expenses | 25.6 | (220 | ) | (2,003 | ) | (347 | ) | 24.5 | (504 | ) | (314 | ) | (220 | ) | ||||||||||||||||||
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|
|
|
| |||||||||||||||||||||||||||
Total other income and (expense), net | (41,447 | ) | (28,539 | ) | (131,380 | ) | (19,226 | ) | (33,563 | ) | (41,447 | ) | ||||||||||||||||||||
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| |||||||||||||||||||||||||||
Profit (loss) before tax from continuing operations | 15,720 | 14,151 | (107,128 | ) | ||||||||||||||||||||||||||||
Profit before tax | 12,272 | 16,217 | 15,720 | |||||||||||||||||||||||||||||
Income tax expense | 20 | (3,150 | ) | (4,893 | ) | (8,322 | ) | 19 | (7,987 | ) | (2,681 | ) | (3,150 | ) | ||||||||||||||||||
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|
|
|
| |||||||||||||||||||||||||||
Profit (loss) for the year from continuing operations | 12,570 | 9,258 | (115,450 | ) | ||||||||||||||||||||||||||||
Discontinued operations | ||||||||||||||||||||||||||||||||
(Loss) profit after tax for the year from discontinued operations, net | 0 | (426 | ) | 822 | ||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Profit (loss) for the year | 12,570 | 8,832 | (114,628 | ) | ||||||||||||||||||||||||||||
Profit for the period | 4,285 | 13,536 | 12,570 | |||||||||||||||||||||||||||||
|
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| |||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||
Equity shareholders of Mechel PAO | 11,557 | 7,126 | (115,163 | ) | 2,409 | 12,628 | 11,557 | |||||||||||||||||||||||||
Non-controlling interests | 1,013 | 1,706 | 535 | 1,876 | 908 | 1,013 | ||||||||||||||||||||||||||
SeeThe accompanying notes to the consolidated financial statements are an integral part of these statements.
MECHEL PAO
CONSOLIDATED STATEMENT OF PROFIT (LOSS) AND
OTHER COMPREHENSIVE INCOME (LOSS) (continued)
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Notes | Year ended December 31, 2017 | Year ended December 31, 2016 | Year ended December 31, 2015 | Notes | Year ended December 31, 2019 | Year ended December 31, 2018 | Year ended December 31, 2017 | |||||||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||||||||||
Other comprehensive income to be reclassified to profit or loss in subsequent periods, net of income tax: | 313 | 430 | 295 | |||||||||||||||||||||||||||||
Other comprehensive (loss) income that may be reclassified to profit or loss in subsequent periods, net of income tax: | (1,771 | ) | (9 | ) | 313 | |||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | 313 | 431 | 287 | (1,771 | ) | (9 | ) | 313 | ||||||||||||||||||||||||
Net (loss) gain on available for sale financial assets | 0 | (1 | ) | 8 | ||||||||||||||||||||||||||||
Other comprehensive income (loss) not to be reclassified to profit or loss in subsequent periods, net of income tax: | 145 | (23 | ) | (194 | ) | (867 | ) | 487 | 145 | |||||||||||||||||||||||
Re-measurement of defined benefit plans | 22 | 145 | (23 | ) | (194 | ) | 21 | (867 | ) | 487 | 145 | |||||||||||||||||||||
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| |||||||||||||||||||||||||||
Other comprehensive income for the year, net of tax | 458 | 407 | 101 | |||||||||||||||||||||||||||||
Other comprehensive (loss) income for the period, net of tax | (2,638 | ) | 478 | 458 | ||||||||||||||||||||||||||||
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|
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| |||||||||||||||||||||||||||
Total comprehensive income (loss) for the year, net of tax | 13,028 | 9,239 | (114,527 | ) | ||||||||||||||||||||||||||||
Total comprehensive income for the period, | 1,647 | 14,014 | 13,028 | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Attributable to: | ||||||||||||||||||||||||||||||||
Equity shareholders of Mechel PAO | 12,012 | 7,529 | (115,064 | ) | (210 | ) | 13,096 | 12,012 | ||||||||||||||||||||||||
Non-controlling interests | 1,016 | 1,710 | 537 | 1,857 | 918 | 1,016 | ||||||||||||||||||||||||||
Earnings (loss) per share | ||||||||||||||||||||||||||||||||
Earnings per share | ||||||||||||||||||||||||||||||||
Weighted average number of common shares | 24 | 416,270,745 | 416,270,745 | 416,270,745 | 23 | 416,256,510 | 416,270,745 | 416,270,745 | ||||||||||||||||||||||||
Basic and diluted, profit (loss) for the year attributable to common equity shareholders of Mechel PAO | 24 | 27.76 | 17.12 | (276.65 | ) | |||||||||||||||||||||||||||
Earnings (loss) per share from continuing operations (Russian rubles per share), basic and diluted | 24 | 27.76 | 17.99 | (278.44 | ) | |||||||||||||||||||||||||||
(Loss) earnings per share from discontinued operations (Russian rubles per share) | 24 | 0 | (0.87 | ) | 1.79 | |||||||||||||||||||||||||||
Earnings per share (Russian rubles per share) attributable to common equity shareholders, basic and diluted | 23 | 5.79 | 30.34 | 27.76 | ||||||||||||||||||||||||||||
SeeThe accompanying notes to the consolidated financial statements are an integral part of these statements.
MECHEL PAO
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as of December 31, 20172019
(All amounts are in millions of Russian rubles)
| Notes | December 31, 2017 | December 31, 2016 | Notes | December 31, 2019 | December 31, 2018 | |||||||||||||||||
Assets | ||||||||||||||||||||||
Current assets | ||||||||||||||||||||||
Inventories | 12 | 37,990 | 35,227 | |||||||||||||||||||
Income tax receivables | 107 | 686 | ||||||||||||||||||||
Trade and other receivables | 13 | 18,762 | 19,054 | |||||||||||||||||||
Other current assets | 14 | 7,589 | 6,942 | |||||||||||||||||||
Other current financial assets | 562 | 167 | ||||||||||||||||||||
Cash and cash equivalents | 15 | 2,452 | 1,689 | |||||||||||||||||||
|
| |||||||||||||||||||||
Total current assets | 67,462 | 63,765 | ||||||||||||||||||||
|
| |||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||
Property, plant and equipment | 16, 18 | 197,875 | 204,353 | 15, 17 | 196,992 | 189,879 | ||||||||||||||||
Mineral licenses | 17 | 33,240 | 36,099 | 16 | 31,075 | 32,068 | ||||||||||||||||
Goodwill and other intangible assets | 17, 18 | 19,211 | 18,355 | 16, 17 | 13,652 | 16,883 | ||||||||||||||||
Investments in associates | 8 | 283 | 265 | 7 | 321 | 293 | ||||||||||||||||
Deferred tax assets | 20 | 96 | 1,502 | 19 | 3,648 | 5,488 | ||||||||||||||||
Othernon-current assets | 14 | 758 | 891 | 13 | 553 | 630 | ||||||||||||||||
Non-current financial assets | 202 | 235 | 232 | 244 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
Totalnon-current assets | 251,665 | 261,700 | 246,473 | 245,485 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
Current assets | ||||||||||||||||||||||
Inventories | 11 | 39,773 | 43,423 | |||||||||||||||||||
Income tax receivables | 65 | 121 | ||||||||||||||||||||
Trade and other receivables | 12 | 15,340 | 17,612 | |||||||||||||||||||
Other current assets | 13 | 6,982 | 8,673 | |||||||||||||||||||
Other current financial assets | 363 | 508 | ||||||||||||||||||||
Cash and cash equivalents | 14 | 3,509 | 1,803 | |||||||||||||||||||
|
| |||||||||||||||||||||
Total current assets | 66,032 | 72,140 | ||||||||||||||||||||
|
| |||||||||||||||||||||
Total assets | 319,127 | 325,465 | 312,505 | 317,625 | ||||||||||||||||||
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| |||||||||||||||||||
Equity and liabilities | ||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||
Interest-bearing loans and borrowings, including interest payable, fines and penalties on overdue amounts of RUB 41,992 million and RUB 38,594 million as of December 31, 2017 and 2016, respectively | 11.1 | 422,533 | 434,165 | |||||||||||||||||||
Trade and other payables | 19 | 33,469 | 40,985 | |||||||||||||||||||
Finance lease liabilities | 27 | 7,476 | 10,175 | |||||||||||||||||||
Income tax payable | 4,578 | 2,552 | ||||||||||||||||||||
Taxes and similar charges payable other than income tax | 21 | 6,696 | 9,195 | |||||||||||||||||||
Advances received | 4,385 | 3,815 | ||||||||||||||||||||
Other current financial liabilities | 11.5 | 734 | — | |||||||||||||||||||
Other current liabilities | 69 | 19 | ||||||||||||||||||||
Pension obligations | 22 | 849 | 944 | |||||||||||||||||||
Provisions | 23 | 3,359 | 3,496 | |||||||||||||||||||
Equity | ||||||||||||||||||||||
Common shares | 23 | 4,163 | 4,163 | |||||||||||||||||||
Preferred shares | 23 | 840 | 833 | |||||||||||||||||||
Treasury shares | 23 | (63 | ) | — | ||||||||||||||||||
Additionalpaid-in capital | 23 | 24,434 | 24,378 | |||||||||||||||||||
Accumulated other comprehensive (loss) income | (848 | ) | 1,771 | |||||||||||||||||||
Accumulated deficit | (273,754 | ) | (274,186 | ) | ||||||||||||||||||
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|
| |||||||||||||||||||
Total current liabilities | 484,148 | 505,346 | ||||||||||||||||||||
Equity attributable to equity shareholders of Mechel PAO | (245,228 | ) | (243,041 | ) | ||||||||||||||||||
Non-controlling interests | 11,631 | 9,846 | ||||||||||||||||||||
|
| |||||||||||||||||||||
Total equity | (233,597 | ) | (233,195 | ) | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||
Interest-bearing loans and borrowings | 11.1 | 17,360 | 11,644 | |||||||||||||||||||
Finance lease liabilities | 27 | 1,878 | 421 | |||||||||||||||||||
Income tax payable | 0 | 540 | ||||||||||||||||||||
Loans and borrowings | 10.1 | 7,205 | 6,538 | |||||||||||||||||||
Lease liabilities | 10.6 | 7,002 | 2,413 | |||||||||||||||||||
Othernon-current financial liabilities | 40,916 | 36,740 | 10.4 | 48,303 | 44,510 | |||||||||||||||||
Othernon-current liabilities | 138 | 159 | 105 | 120 | ||||||||||||||||||
Pension obligations | 22 | 3,512 | 3,501 | 21 | 4,933 | 3,819 | ||||||||||||||||
Provisions | 23 | 3,814 | 3,420 | 22 | 5,238 | 3,719 | ||||||||||||||||
Deferred tax liabilities | 20 | 11,494 | 16,282 | 19 | 13,877 | 13,506 | ||||||||||||||||
|
|
|
| |||||||||||||||||||
Totalnon-current liabilities | 79,112 | 72,707 | 86,663 | 74,625 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
Current liabilities | ||||||||||||||||||||||
Loans and borrowings, including interest payable, fines and penalties on overdue amounts of RUB 11,111 million and RUB 9,877 million as of December 31, 2019 and 2018, respectively | 10.1 | 381,317 | 412,294 | |||||||||||||||||||
Trade and other payables | 18 | 38,391 | 34,800 | |||||||||||||||||||
Lease liabilities | 10.6 | 10,353 | 5,880 | |||||||||||||||||||
Income tax payable | 9,161 | 6,425 | ||||||||||||||||||||
Taxes and similar charges payable other than income tax | 20 | 9,228 | 6,106 | |||||||||||||||||||
Advances received and other current liabilities | 5,816 | 5,096 | ||||||||||||||||||||
Pension obligations | 21 | 615 | 772 | |||||||||||||||||||
Provisions | 22 | 4,558 | 4,822 | |||||||||||||||||||
|
| |||||||||||||||||||||
Total current liabilities | 459,439 | 476,195 | ||||||||||||||||||||
|
| |||||||||||||||||||||
Total liabilities | 563,260 | 578,053 | 546,102 | 550,820 | ||||||||||||||||||
|
| |||||||||||||||||||||
Equity | ||||||||||||||||||||||
Common shares | 24 | 4,163 | 4,163 | |||||||||||||||||||
Preferred shares | 24 | 833 | 833 | |||||||||||||||||||
Additionalpaid-in capital | 24 | 24,378 | 28,326 | |||||||||||||||||||
Accumulated other comprehensive income | 1,303 | 848 | ||||||||||||||||||||
Accumulated deficit | (283,743 | ) | (294,444 | ) | ||||||||||||||||||
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| |||||||||||||||||||||
Equity attributable to equity shareholders of Mechel PAO | (253,066 | ) | (260,274 | ) | ||||||||||||||||||
Non-controlling interests | 6, 7 | 8,933 | 7,686 | |||||||||||||||||||
|
| |||||||||||||||||||||
Total equity | (244,133 | ) | (252,588 | ) | ||||||||||||||||||
|
|
|
| |||||||||||||||||||
Total equity and liabilities | 319,127 | 325,465 | 312,505 | 317,625 | ||||||||||||||||||
|
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|
| |||||||||||||||||||
SeeThe accompanying notes to the consolidated financial statements are an integral part of these statements.
MECHEL PAO
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless shares numbers)
| Attributable to equity shareholders of the parent | ||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Equity attributable to shareholders of Mechel PAO | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
| Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||
As of January 1, 2015 | 416,270,745 | 4,163 | 83,254,149 | 833 | 25,592 | (186,272 | ) | 1,018 | (154,666 | ) | 8,253 | (146,413 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
(Loss) profit for the period | — | — | — | — | — | (115,163 | ) | — | (115,163 | ) | 535 | (114,628 | ) | |||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||
Net gain on available for sale financial assets | — | — | — | — | — | — | 8 | 8 | — | 8 | ||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 22 | — | — | — | — | — | — | (196 | ) | (196 | ) | 2 | (194 | ) | ||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | — | 287 | 287 | — | 287 | ||||||||||||||||||||||||||||||||
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Total comprehensive (loss) income for the year | — | — | — | — | — | (115,163 | ) | 99 | (115,064 | ) | 537 | (114,527 | ) | |||||||||||||||||||||||||||||
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Transfer of cumulative translation adjustment due to disposal of discontinued operations | — | — | — | — | — | — | (798 | ) | (798 | ) | — | (798 | ) | |||||||||||||||||||||||||||||
Transfer of actuarial gains (losses) due to disposal of discontinued operations | — | — | — | — | — | (126 | ) | 126 | — | — | — | |||||||||||||||||||||||||||||||
Dividends declared to equity shareholders of Mechel PAO | 24 | — | — | — | — | — | (4 | ) | — | (4 | ) | — | (4 | ) | ||||||||||||||||||||||||||||
Acquisition ofnon-controlling interests | 6, 24 | — | — | — | — | 2,730 | — | — | 2,730 | (2,842 | ) | (112 | ) | |||||||||||||||||||||||||||||
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As of December 31, 2015 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,322 | (301,565 | ) | 445 | (267,802 | ) | 5,948 | (261,854 | ) | |||||||||||||||||||||||||||||
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| |||||||||||||||||||||||
| Attributable to equity shareholders of the parent | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Equity attributable to shareholders of Mechel PAO | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||||
| Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||||
As of January 1, 2017 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,326 | 848 | (294,444 | ) | (260,274 | ) | 7,686 | (252,588 | ) | |||||||||||||||||||||||||||||||
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Profit for the period | — | — | — | — | — | — | 11,557 | 11,557 | 1,013 | 12,570 | ||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 21 | — | — | — | — | — | 145 | — | 145 | — | 145 | |||||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | 310 | — | 310 | 3 | 313 | ||||||||||||||||||||||||||||||||||
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Total comprehensive income for the period | — | — | — | — | — | 455 | 11,557 | 12,012 | 1,016 | 13,028 | ||||||||||||||||||||||||||||||||||
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Dividends declared to equity shareholders of Mechel PAO | 23 | — | — | — | — | — | — | (856 | ) | (856 | ) | — | (856 | ) | ||||||||||||||||||||||||||||||
Dividends declared tonon-controlling interests | 23 | — | — | — | — | — | — | — | — | (359 | ) | (359 | ) | |||||||||||||||||||||||||||||||
Change innon-controlling interests | 23 | — | — | — | — | (3,948 | ) | — | — | (3,948 | ) | 590 | (3,358 | ) | ||||||||||||||||||||||||||||||
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As of December 31, 2017 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | 1,303 | (283,743 | ) | (253,066 | ) | 8,933 | (244,133 | ) | |||||||||||||||||||||||||||||||
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See accompanying notes to the consolidated financial statements.
MECHEL PAO
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless shares numbers)
| Attributable to equity shareholders of the parent | ||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Equity attributable to shareholders of Mechel PAO | Non- controlling interests | Total equity | |||||||||||||||||||||||||||||||||||
| Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||
As of January 1, 2016 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,322 | (301,565 | ) | 445 | (267,802 | ) | 5,948 | (261,854 | ) | |||||||||||||||||||||||||||||
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Profit for the period | — | — | — | — | — | 7,126 | — | 7,126 | 1,706 | 8,832 | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||
Net loss on available for sale financial assets | — | — | — | — | — | — | (1 | ) | (1 | ) | — | (1 | ) | |||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 22 | — | — | — | — | — | — | (23 | ) | (23 | ) | — | (23 | ) | ||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | — | 427 | 427 | 4 | 431 | ||||||||||||||||||||||||||||||||
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Total comprehensive income for the year | — | — | — | — | — | 7,126 | 403 | 7,529 | 1,710 | 9,239 | ||||||||||||||||||||||||||||||||
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Reversal of unclaimed declared dividends tonon-controlling interest upon expiration of limitation period | — | — | — | — | — | — | — | — | 35 | 35 | ||||||||||||||||||||||||||||||||
Dividends declared to equity shareholders of Mechel PAO | 24 | — | — | — | — | — | (5 | ) | — | (5 | ) | — | (5 | ) | ||||||||||||||||||||||||||||
Dividends declared tonon-controlling interests | 24 | — | — | — | — | — | — | — | — | (3 | ) | (3 | ) | |||||||||||||||||||||||||||||
Acquisition ofnon-controlling interests | 6, 24 | — | — | — | — | 4 | — | — | 4 | (4 | ) | 0 | ||||||||||||||||||||||||||||||
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As of December 31, 2016 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,326 | (294,444 | ) | 848 | (260,274 | ) | 7,686 | (252,588 | ) | |||||||||||||||||||||||||||||
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| Attributable to equity shareholders of the parent | Non- controlling interests | Total equity | ||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated other comprehensive income (loss) | Accumulated deficit | Equity attributable to shareholders of Mechel PAO | |||||||||||||||||||||||||||||||||||||
Notes | Shares Quantity | Amount | Shares Quantity | Amount | ||||||||||||||||||||||||||||||||||||||
As of January 1, 2018 before the effect of IFRS 9 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | 1,303 | (283,743 | ) | (253,066 | ) | 8,933 | (244,133 | ) | |||||||||||||||||||||||||||||
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Adjustment on initial application of IFRS 9 | 3 | — | — | — | — | — | — | (1,684 | ) | (1,684 | ) | (5 | ) | (1,689 | ) | |||||||||||||||||||||||||||
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As of January 1, 2018 adjusted for the effect of IFRS 9 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | 1,303 | (285,427 | ) | (254,750 | ) | 8,928 | (245,822 | ) | |||||||||||||||||||||||||||||
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Profit for the period | — | — | — | — | — | 12,628 | 12,628 | 908 | 13,536 | |||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 21 | — | — | — | — | — | 487 | — | 487 | — | 487 | |||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | — | — | — | — | — | (19 | ) | — | (19 | ) | 10 | (9 | ) | |||||||||||||||||||||||||||||
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Total comprehensive income for the period | — | — | — | — | — | 468 | 12,628 | 13,096 | 918 | 14,014 | ||||||||||||||||||||||||||||||||
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Dividends declared to equity shareholders of Mechel PAO | 23 | — | — | — | — | — | — | (1,387 | ) | (1,387 | ) | — | (1,387 | ) | ||||||||||||||||||||||||||||
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As of December 31, 2018 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | 1,771 | (274,186 | ) | (243,041 | ) | 9,846 | (233,195 | ) | |||||||||||||||||||||||||||||
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See accompanying notes to the consolidated financial statements.
MECHEL PAO
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (continued)
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless shares numbers)
| Attributable to equity shareholders of the parent | Attributable to equity shareholders of the parent | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common shares | Preferred shares | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive income (loss) | Equity attributable to shareholders of Mechel PAO | Non- controlling interests | Total equity | Common shares | Preferred shares | Treasury shares | Additional paid-in capital | Accumulated other compre hensive income (loss) | Accumulated deficit | Equity attributable to shareholders of Mechel PAO | Non- controlling interests | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notes | Shares Quantity | Amount | Shares Quantity | Amount | Notes | Shares Quantity | Amount | Shares Quantity | Amount | Shares Quantity | Amount | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of January 1, 2017 | 416,270,745 | 4,163 | 83,254,149 | 833 | 28,326 | (294,444 | ) | 848 | (260,274 | ) | 7,686 | (252,588 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of January 1, 2019 before the effect of IFRS 16 | 416,270,745 | 4,163 | 83,254,149 | 833 | — | — | 24,378 | 1,771 | (274,186 | ) | (243,041 | ) | 9,846 | (233,195 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Adjustment on initial application of IFRS 16 | 3 | — | — | — | — | — | — | — | — | (461 | ) | (461 | ) | (72 | ) | (533 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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As of January 1, 2019 adjusted for the effect of IFRS 16 | 416,270,745 | 4,163 | 83,254,149 | 833 | — | — | 24,378 | 1,771 | (274,647 | ) | (243,502 | ) | 9,774 | (233,728 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Profit for the period | 0 | 0 | 0 | 0 | 0 | 11,557 | 0 | 11,557 | 1,013 | 12,570 | — | — | — | — | — | — | — | — | 2,409 | 2,409 | 1,876 | 4,285 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Re-measurement losses on defined benefit plans | 22 | 0 | 0 | 0 | 0 | 0 | 0 | 145 | 145 | 0 | 145 | 21 | — | — | — | — | — | — | — | (848 | ) | — | (848 | ) | (19 | ) | (867 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | 0 | 0 | 0 | 0 | 0 | 0 | 310 | 310 | 3 | 313 | — | — | — | — | — | — | — | (1,771 | ) | — | (1,771 | ) | — | (1,771 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income for the year | 0 | 0 | 0 | 0 | 0 | 11,557 | 455 | 12,012 | 1,016 | 13,028 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income for the period | — | — | — | — | — | — | — | (2,619 | ) | 2,409 | (210 | ) | 1,857 | 1,647 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Sale of preferred shares kept as treasury shares by the Group | — | — | 709,130 | 7 | — | — | 56 | — | — | 63 | — | 63 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reacquired common shares | — | — | — | (1,018,996 | ) | (63 | ) | — | — | — | (63 | ) | — | (63 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared to equity shareholders of Mechel PAO | 24 | 0 | 0 | 0 | 0 | 0 | (856 | ) | 0 | (856 | ) | 0 | (856 | ) | 23 | — | — | — | — | — | — | — | — | (1,516 | ) | (1,516 | ) | — | (1,516 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared tonon-controlling interests | 24 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | (359 | ) | (359 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change innon-controlling interests | 6, 24 | 0 | 0 | 0 | 0 | (3,948 | ) | 0 | 0 | (3,948 | ) | 590 | (3,358 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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As of December 31, 2017 | 416,270,745 | 4,163 | 83,254,149 | 833 | 24,378 | (283,743 | ) | 1,303 | (253,066 | ) | 8,933 | (244,133 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2019 | 416,270,745 | 4,163 | 83,963,279 | 840 | (1,018,996 | ) | (63 | ) | 24,434 | (848 | ) | (273,754 | ) | (245,228 | ) | 11,631 | (233,597 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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See accompanying notes to the consolidated financial statements.
MECHEL PAO
CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles)
| Year ended December 31, | ||||||||||||||||
| Notes | 2017 | 2016 | 2015 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Profit (loss) for the year | 12,570 | 8,832 | (114,628 | ) | ||||||||||||
Less loss (profit) after tax for the year from discontinued operations, net | 0 | 426 | (822 | ) | ||||||||||||
Profit (loss) for the year from continuing operations | 12,570 | 9,258 | (115,450 | ) | ||||||||||||
Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: | ||||||||||||||||
Depreciation | 12,555 | 11,813 | 12,397 | |||||||||||||
Depletion and amortisation | 1,672 | 1,901 | 1,688 | |||||||||||||
Foreign exchange (gain) loss, net | (4,237 | ) | (25,947 | ) | 71,106 | |||||||||||
Deferred tax (income) expense | 20 | (3,401 | ) | 5,104 | 7,946 | |||||||||||
Provision for doubtful accounts | 13, 14 | 332 | 758 | 1,507 | ||||||||||||
Write-off of accounts receivable | 25.1 | 109 | 113 | 247 | ||||||||||||
Write-off of inventories to net realisable value | 12 | 470 | 364 | 1,003 | ||||||||||||
Revision in estimated cash flows of rehabilitation provision | 25.3 | 0 | (375 | ) | (47 | ) | ||||||||||
Loss onwrite-off ofnon-current assets | 321 | 1,953 | 691 | |||||||||||||
Impairment of goodwill and othernon-current assets | 18 | 6,081 | 5,202 | 1,460 | ||||||||||||
Loss on disposal ofnon-current assets | 21 | 57 | 102 | |||||||||||||
Gain on sale of investments | 25.6 | (2 | ) | (186 | ) | — | ||||||||||
Gain on restructuring and forgiveness of accounts payable andwrite-off of accounts payable with expired legal term | 25.6 | (963 | ) | (115 | ) | (222 | ) | |||||||||
Curtailment and remeasurement of pension obligations | 25.3 | (175 | ) | (325 | ) | (142 | ) | |||||||||
Pension service cost and actuarial loss, other related expenses | 22 | 142 | 154 | 192 | ||||||||||||
Finance income | 25.4 | (633 | ) | (1,176 | ) | (183 | ) | |||||||||
Finance costs including fines and penalties on overdue loans and borrowings and finance leases payments of RUB 1,161 million, RUB 6,013 million and RUB 19,167 million for the periods ended December 31, 2017, 2016 and 2015, respectively | 25.5 | 47,610 | 54,240 | 60,452 | ||||||||||||
VEB commissionswrite-off | 25.6 | 0 | 1,411 | — | ||||||||||||
Gain on royalty and other proceeds associated with disposal of Bluestone | 25.6 | (474 | ) | (121 | ) | — | ||||||||||
Provision fornon-recoverable advances to pension funds | 25.6 | 0 | 408 | — | ||||||||||||
Other | 281 | 51 | 480 | |||||||||||||
Changes in working capital items: | ||||||||||||||||
Trade and other receivables | (318 | ) | (5,542 | ) | 4,597 | |||||||||||
Inventories | (4,508 | ) | (1,070 | ) | 1,873 | |||||||||||
Trade and other payables | (3,435 | ) | (4,259 | ) | (8,125 | ) | ||||||||||
Advances received | 625 | 588 | (664 | ) | ||||||||||||
Taxes payable and other liabilities | 4,064 | 2,368 | (1,465 | ) | ||||||||||||
Other current assets | (895 | ) | (883 | ) | 997 | |||||||||||
Income tax paid | (4,530 | ) | (2,101 | ) | (1,437 | ) | ||||||||||
Net operating cash flows from discontinued operations | 0 | (436 | ) | (136 | ) | |||||||||||
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Net cash provided by operating activities | 63,282 | 53,207 | 38,867 | |||||||||||||
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| Year ended December 31, | ||||||||||||||||
| Notes | 2019 | 2018 | 2017 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Profit for the period | 4,285 | 13,536 | 12,570 | |||||||||||||
Adjustments to reconcile profit to net cash provided by operating activities | ||||||||||||||||
Depreciation of property, plant and equipment and amortisation of mineral licenses and other intangible assets | 15,176 | 13,859 | 14,227 | |||||||||||||
Foreign exchange (gain) loss, net | (19,241 | ) | 25,775 | (4,237 | ) | |||||||||||
Deferred income tax expense (benefit) | 19 | 2,288 | (2,596 | ) | (3,401 | ) | ||||||||||
Changes in allowance for expected credit losses and write-off of trade and other receivables and payables, net | 73 | 517 | (522 | ) | ||||||||||||
Write-off of inventories to net realisable value | 11 | 1,763 | 1,162 | 470 | ||||||||||||
Impairment of goodwill and other non-current assets, net and loss on write-off ofnon-current assets | | 17, 24.1, 24.3 | | 2,880 | 7,953 | 6,423 | ||||||||||
Finance income | 24.4 | (600 | ) | (34,056 | ) | (633 | ) | |||||||||
Finance costs including fines and penalties on overdue loans and borrowings and lease payments | 24.4 | 38,830 | 42,052 | 47,610 | ||||||||||||
Provisions for legal claims, taxes and other provisions | 3,630 | 4,940 | 4,222 | |||||||||||||
Other | 198 | 575 | (228 | ) | ||||||||||||
Changes in working capital items | ||||||||||||||||
Trade and other receivables | 1,546 | 1,354 | (318 | ) | ||||||||||||
Inventories | (1,511 | ) | (7,858 | ) | (4,508 | ) | ||||||||||
Trade and other payables | 4,037 | 4,150 | (3,435 | ) | ||||||||||||
Advances received | 650 | 485 | 625 | |||||||||||||
Taxes payable and other liabilities | 5,151 | 683 | (158 | ) | ||||||||||||
Other assets | 1,238 | (851 | ) | (895 | ) | |||||||||||
Income tax paid | (2,735 | ) | (3,562 | ) | (4,530 | ) | ||||||||||
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Net cash provided by operating activities | 57,658 | 68,118 | 63,282 | |||||||||||||
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MECHEL PAO
CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles)
| Year ended December 31, | Year ended December 31, | |||||||||||||||||||||||||||
| Notes | 2017 | 2016 | 2015 | Notes | 2019 | 2018 | 2017 | |||||||||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||||||
Proceeds from disposal of securities | 0 | — | 143 | |||||||||||||||||||||||||
Loans issued and other investments | (525 | ) | (133 | ) | (6 | ) | — | — | (525 | ) | ||||||||||||||||||
Interest received | 165 | 128 | 25 | 76 | 188 | 165 | ||||||||||||||||||||||
Royalty and other proceeds associated with disposal of Bluestone | 474 | 103 | 101 | |||||||||||||||||||||||||
Proceeds from disposal of subsidiaries, net of cash disposed | 94 | 145 | 76 | |||||||||||||||||||||||||
Purchases of available for sale securities | 0 | (4 | ) | — | ||||||||||||||||||||||||
Royalty and other proceeds associated with disposal of subsidiaries | 17 | 3 | 568 | |||||||||||||||||||||||||
Proceeds from loans issued and other investments | 144 | 31 | 15 | 313 | 9 | 144 | ||||||||||||||||||||||
Proceeds from disposals of property, plant and equipment | 328 | 285 | 405 | 211 | 215 | 328 | ||||||||||||||||||||||
Purchases of property, plant and equipment | (6,460 | ) | (4,742 | ) | (5,076 | ) | (6,282 | ) | (5,472 | ) | (6,460 | ) | ||||||||||||||||
Purchases of intangible assets | 17 | (771 | ) | — | — | 16 | — | (150 | ) | (771 | ) | |||||||||||||||||
Purchases of mineral licenses and other related payments | 0 | — | (71 | ) | ||||||||||||||||||||||||
Interest paid, capitalized | (587 | ) | (782 | ) | (830 | ) | ||||||||||||||||||||||
Interest paid, capitalised | (256 | ) | (440 | ) | (587 | ) | ||||||||||||||||||||||
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Net cash used in investing activities | (7,138 | ) | (4,969 | ) | (5,218 | ) | (5,921 | ) | (5,647 | ) | (7,138 | ) | ||||||||||||||||
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Cash flows from financing activities | ||||||||||||||||||||||||||||
Proceeds from loans and borrowings | 23,200 | 4,002 | 13,875 | |||||||||||||||||||||||||
Repayment of loans and borrowings | (35,033 | ) | (42,322 | ) | (11,896 | ) | ||||||||||||||||||||||
Proceeds from loans and borrowings, including proceeds from factoring arrangement of RUB 214 million, RUB 918 million and RUB 272 million for the periods ended December 31, 2019, 2018 and 2017, respectively | 7,599 | 76,504 | 23,200 | |||||||||||||||||||||||||
Repayment of loans and borrowings, including payments from factoring arrangement of RUB 2,222 million, RUB 435 million and RUB 1,123 million for the periods ended December 31, 2019, 2018 and 2017, respectively | (20,772 | ) | (97,269 | ) | (35,033 | ) | ||||||||||||||||||||||
Repayment of other current financial liabilities | 10.5 | — | (442 | ) | — | |||||||||||||||||||||||
Dividends paid to shareholders of Mechel PAO | (856 | ) | (5 | ) | (4 | ) | (1,515 | ) | (1,386 | ) | (856 | ) | ||||||||||||||||
Dividends paid tonon-controlling interest | (122 | ) | (2 | ) | (1 | ) | ||||||||||||||||||||||
Dividends paid to non-controlling interests | (16 | ) | (8 | ) | (122 | ) | ||||||||||||||||||||||
Interest paid, including fines and penalties | (31,948 | ) | (33,872 | ) | (28,910 | ) | (30,923 | ) | (33,308 | ) | (31,948 | ) | ||||||||||||||||
Acquisition ofnon-controlling interests in subsidiaries | (3,358 | ) | — | (1 | ) | — | — | (3,358 | ) | |||||||||||||||||||
Proceeds from sales of 49% stakes in Elga coal complex, withput-option granted | 6 | 0 | 34,300 | — | ||||||||||||||||||||||||
Repayment of obligations under finance lease | (3,513 | ) | (3,238 | ) | (2,677 | ) | ||||||||||||||||||||||
Repayment of lease liabilities | (2,276 | ) | (2,780 | ) | (3,513 | ) | ||||||||||||||||||||||
Effect of sale and leaseback transactions | 248 | — | — | |||||||||||||||||||||||||
Deferred payments for acquisition of assets | (455 | ) | — | — | (341 | ) | (629 | ) | (455 | ) | ||||||||||||||||||
Deferred consideration paid for the acquisition of subsidiaries in prior periods | (3,652 | ) | (4,732 | ) | (4,819 | ) | (361 | ) | (3,968 | ) | (3,652 | ) | ||||||||||||||||
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Net cash used in financing activities | (55,737 | ) | (45,869 | ) | (34,433 | ) | (48,357 | ) | (63,286 | ) | (55,737 | ) | ||||||||||||||||
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Effect of exchange rate changes on cash and cash equivalents | (637 | ) | (1,807 | ) | 331 | |||||||||||||||||||||||
Foreign exchange (gain) loss on cash and cash equivalents, net | (891 | ) | 63 | (637 | ) | |||||||||||||||||||||||
Changes in allowance for expected credit losses on cash and cash equivalents | 14 | (2 | ) | (91 | ) | — | ||||||||||||||||||||||
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Net (decrease) increase in cash and cash equivalents | (230 | ) | 562 | (453 | ) | |||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 2,487 | (843 | ) | (230 | ) | |||||||||||||||||||||||
Cash and cash equivalents at beginning of period | 15 | 1,689 | 3,079 | 4,074 | 14 | 1,803 | 2,452 | 1,689 | ||||||||||||||||||||
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Cash and cash equivalents, net of overdrafts at beginning of period | 15 | 1,453 | 891 | 1,344 | 14 | 380 | 1,223 | 1,453 | ||||||||||||||||||||
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Cash and cash equivalents at end of period | 15 | 2,452 | 1,689 | 3,079 | 14 | 3,509 | 1,803 | 2,452 | ||||||||||||||||||||
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Cash and cash equivalents, net of overdrafts at end of period | 15 | 1,223 | 1,453 | 891 | 14 | 2,867 | 380 | 1,223 | ||||||||||||||||||||
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The accompanying notes to the consolidated financial statements are an integral part of these statements.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| 1. | Corporate information |
| (a) | Information |
Mechel PAO (“Mechel”, formerly —– Mechel OAO and Mechel Steel Group OAO) was incorporated on March 19, 2003, under the laws of the Russian Federation in connection with a reorganization to serve as a holding company for various steel and mining companies owned by two individual shareholders (the “Controlling Shareholders”). During 2006, one of the Controlling Shareholders sold all his Mechel’s stock to the other Controlling Shareholder, Igor V. Zyuzin. Igor V. Zyuzin with his family members is the ultimate controlling party. In accordance with the changes in the Civil Code of the Russian Federation Mechel has registered changes in its Charter on March 17, 2016 and changed its corporate name from Mechel OAO to Mechel PAO. The registered office is located at Krasnoarmeyskaya St. 1, Moscow, 125167, Russian Federation. Mechel and its subsidiaries are collectively referred to herein as the “Group”. Set forth below is a summary of the Group’s primary subsidiaries:
Name of subsidiary | Registered in | Core business | Date control acquired / date of incorporation (*) | Interest in voting stock held by the Group at December 31, | ||||||||
Southern Kuzbass Coal | Russia | Coal mining | January 1999 | 99.1 | % | |||||||
Chelyabinsk Metallurgical Plant (CMP) | Russia | Steel products | December 2001 | 94.2 | % | |||||||
Vyartsilya Metal Products Plant (VMPP) | Russia | Steel products | May 2002 | 93.3 | % | |||||||
Beloretsk Metallurgical Plant (BMP) | Russia | Steel products | June 2002 | 94.8 | % | |||||||
Urals Stampings Plant (USP) | Russia | Steel products | April 2003 | 93.8 | % | |||||||
Korshunov Mining Plant (KMP) | Russia | Iron ore mining | October 2003 | 90.0 | % | |||||||
Mechel Nemunas (MN) | Lithuania | Steel products | October 2003 | 100.0 | % | |||||||
Mechel Energo | Russia | Power | February 2004 | 100.0 | % | |||||||
Port Posiet | Russia | Transshipment | February 2004 | 97.8 | % | |||||||
Izhstal | Russia | Steel products | May 2004 | 90.0 | % | |||||||
Port Kambarka | Russia | Transshipment | April 2005 | 90.4 | % | |||||||
Mechel Service | Russia | Trading | May 2005 | 100.0 | % | |||||||
Mechel Coke | Russia | Coke production | June 2006 | 100.0 | % | |||||||
Moscow Coke and Gas Plant (Moskoks) | Russia | Coke production | October 2006 | 99.5 | % | |||||||
Southern Kuzbass Power Plant (SKPP) | Russia | Power generation | April 2007 | 98.3 | % | |||||||
Kuzbass Power Sales Company (KPSC) | Russia | Electricity distribution | June 2007 | 72.1 | % | |||||||
Bratsk Ferroalloy Plant (BFP) | Russia | Ferrosilicon production | August 2007 | 100.0 | % | |||||||
Yakutugol | Russia | Coal mining | October 2007 | 100.0 | % | |||||||
Port Temryuk | Russia | Transshipment | March 2008 | 100.0 | % | |||||||
Mechel Carbon AG | Switzerland | Trading | April 2008 | 100.0 | % | |||||||
HBL Holding GmbH (HBL) | Germany | Trading | September 2008 | 100.0 | % | |||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Name of subsidiary | Registered in | Core business | Date control acquired / date of incorporation (*) | Interest in voting stock held by the Group at December 31, | ||||||||
| ||||||||||||
Mechel Service Stahlhandel Austria GmbH and its subsidiaries | Austria | Trading | September 2012 | 100.0 | % | |||||||
Elgaugol | Russia | Coal mining | August 2013 | 51.0 | %** | |||||||
Elga-road | Russia | Railroad transportation | January 2016 | 51.0 | %** | |||||||
| * | Date, when a control interest was acquired or a new company established. |
| ** | In 2016, the Group sold 49% stakes in Elgaugol and Elga-road to Gazprombank. Simultaneously with this transaction, the Group granted to Gazprombank a put option to sell 49% stakes in these companies to the Group. The transaction in fact represents a financial liability, and these entities are consolidated based on 100% ownership |
| (b) | Business |
The Group operates in three business segments: steel (comprising steel and steel products), mining (comprising coal, iron ore and coke) and power (comprising electricity (generation and transportation)distribution) and heat power generation), and conducts operations in Russia, Kazakhstanthe CIS countries, Europe and Europe.Asia Pacific. The Group sells its products within Russia and foreign markets. Through acquisitions, the Group has added various businesses to explore new opportunities and build an integrated Group of steel, mining, ferroalloy and power companies. The Group operates in a highly competitive and cyclical industry; any local or global downturn in the industries may have an adverse effect on the Group’s results of operations and financial condition. While the Group will utilize funds from operations, it expects to continue to rely on operating cash flow and long termlong-term debt to finance major investment projects, focus on refinancing and restructuring of the loan portfolio and other financing sources for its capital needs. As discussed in Notes 4 and 5, management believes that the Group will secure adequate financing.
| (c) | Authorisation for issuance |
These consolidated financial statements as of December 31, 2019 and for the year then ended were authorised for issuance on March 19, 2020.
| 2. | Basis of preparation of the consolidated financial statements |
| (a) | Basis of preparation |
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared on a historical cost basis, except for specific financial assets and liabilities that have been measured at fair value.
Russian associates and subsidiaries of the Group maintain their books and records in Russian rubles and prepare accounting reports in accordance with the accounting principles and practices mandated by Russian Accounting Standards (RAS). Foreign subsidiaries and associates maintain their books and records in different foreign functional currencies and prepare accounting reports in accordance with generally accepted accounting principles (GAAP) in various jurisdictions. The financial statements and accounting reports for the Group and its
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
subsidiaries and associates for the purposes of preparation of the consolidated financial statements in accordance with IFRS have been translated and adjusted on the basis of the respective standalone RAS or other GAAP financial statements.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The accompanying consolidated financial statements differ from the financial statements issued for the RAS and other GAAP purposes in that they reflect certain adjustments, not recorded in the statutory books, which are appropriate to present the financial position, results of operations and cash flows in accordance with IFRS. The principal adjustments relate to: (1) purchase accounting; (2) recognition of interest expense and certain operating expenses; (3) valuation and depreciation of property, plant and equipment and mineral licenses; (4) defined benefit plans and other long-term benefits; (5) foreign currency translation; (6) deferred income taxes; (7) accounting for tax penalties, uncertainties and contingencies; (8) revenue recognition; (9) valuation allowances for unrecoverable assets; (10) accounting for financial instruments; (11) finance leases and (12) recording investments at fair value.
The consolidated financial statements of the Group comply with the Russian Federal Law No. 208On Consolidated Financial Statements (Law“208-FZ” “208-FZ”), which was adopted on July 27, 2010. The Law208-FZ provides the legal basis for certain entities to prepare the financial statements in accordance with IFRS as issued by the IASB and subsequently endorsed for use in the Russian Federation. As of December 31, 2017,2019, all currently effective standards and interpretations issued by the IASB have been endorsed for use in Russia. The consolidated financial statements are presented in millions of Russian rubles, except when otherwise indicated.
| (b) | Basis of consolidation |
The consolidated financial statements comprise the financial statements of the Group and its subsidiaries for the year ended December 31, 2017.2019. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Specifically, the Group controls an investee if, and only if, the Group has:
Power over the investee (i.e., existing rights that give it the current ability to direct the relevant activities of the investee);
Exposure, or rights, to variable returns from its involvement with the investee;
The ability to use its power over the investee to affect its returns.
Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Group gains control until the date the Group ceases to control the subsidiary.
Profit or loss and each component of other comprehensive income (loss) (OCI) are attributed to the equity holders of the parent of the Group and to thenon-controlling interests, even if this results in thenon-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction.
If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities,non-controlling interest and other components of equity, while any resultant gain or loss is recognised
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
in the consolidated statement of profit (loss) and other comprehensive income (loss).income. Any investment retained is recognised at fair value.
| 3. | Summary of significant accounting policies |
| (a) | Business combinations and goodwill |
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of anynon-controlling interests in the acquiree. For each business combination, the Group elects whether to measure thenon-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.
When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date.
Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IAS 39Financial Instruments: Recognition and Measurement, is measured at fair value with the changes in fair value recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised fornon-controlling interests) and any previous interest held over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Groupre-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.
An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries.
The Group’s investments in its associate are accounted for using the equity method.
Under the equity method, the investment in an associate is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the associate is included in the carrying amount of the investment and is not tested for impairment separately.
The consolidated statement of profit (loss) and other comprehensive income (loss) reflects the Group’s share of the results of operations of the associate. Any change in OCI of those investees is presented as part of the Group’s OCI movements. In addition, when there has been a change recognised directly in the equity of the associate, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group and the associate are eliminated to the extent of the interest in the associate.
The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the consolidated statement of profit (loss) and other comprehensive income (loss) outside operating profit and represents profit or loss after tax andnon-controlling interests in the subsidiaries of the associate.
The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment in associate and its carrying value, and then recognises the loss as ‘Share of profit (loss) of associates’ in the consolidated statement of profit (loss) and other comprehensive income (loss).
Upon loss of significant influence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).
The Group presents assets and liabilities in the consolidated statement of financial position based oncurrent/non-current classification. An asset is current when it is:
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
All other assets are classified asnon-current.
A liability is current when:
The Group classifies all other liabilities asnon-current. Deferred tax assets and liabilities are classified asnon-current assets and liabilities.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
The principal or the most advantageous market must be accessible by the Group.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
For assets and liabilities that are recognised in the consolidated financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy byre-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured, regardless of when the payment is received. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding discounts, rebates, and sales taxes or duty.
Revenues are inflows from sales of goods that constitute ongoing major operations of the Group and are reported as such in the consolidated statement of profit (loss) and other comprehensive income (loss). Inflows from incidental and peripheral operations, net of related costs, are considered gains and are included in other operating income and other income in the consolidated statement of profit (loss) and other comprehensive income (loss).
The following criteria are also applicable to other specific revenue transactions:
Sales of goods
Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer. Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns and allowances, trade discounts, associated sales taxes (VAT) and export duties.
Principal vs agent arrangements
The Group is involved inre-selling goods and services produced or rendered by other entities. Revenues are reported based on the gross amount billed to the customer when the Group has earned revenue as a principal from the sale of goods or services, or the net amount retained (that is, the amount billed to the customer reduced by the amount billed by the supplier) when the Group has earned a commission or fee as an agent.
Shipping and handling costs
The Group classifies all amounts billed to customers in a sale transaction and related to shipping and handling as part of sales revenue and all related shipping and handling costs as selling and distribution expenses when the Group is acting as a principal in accordance with the requirements of IAS 18Revenue.
Sales of power
In the Power segment (Note 26), revenue is recognised based on unit of power measure (kilowatts) delivered to customers, since at that point revenue recognition criteria are met. The billings are usually done on a monthly basis, several days after each month end.
Interest income
For all financial instruments measured at amortised cost interest income is recorded using the effective interest rate (EIR). The EIR is the rate that exactly discounts the estimated future cash receipts over the expected
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income is included in finance income in the consolidated statement of profit (loss) and other comprehensive income (loss).
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates and generates taxable income.
Uncertain tax positions
The Group’s policy is to comply fully with the applicable tax regulations in the jurisdictions in which its operations are subject to income taxes. The Group’s estimates of current income tax expense and liabilities are calculated assuming that all tax computations filed by the Group’s subsidiaries will be subject to a review or audit by the relevant tax authorities. The Group and the relevant tax authorities may have different interpretations of how regulations should be applied to actual transactions. Such uncertain tax positions are accounted for in accordance with IAS 12Income Taxesand IAS 37Provisions, Contingent Liabilities and Contingent Assets. The Group applies single most likely outcome method of uncertain tax positions estimation.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognised for all taxable temporary differences, except:
Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except:
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets arere-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Deferred tax relating to items recognised outside profit or loss is recognised in correlation to the underlying transaction either in OCI or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Tax benefits acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, are recognised subsequently if new information about facts and circumstances change. The adjustment is either treated as a reduction in goodwill (as long as it does not exceed goodwill) if it was incurred during the measurement period or recognised in profit or loss.
The Group’s consolidated financial statements are presented in Russian rubles to comply with the Law208-FZ. Russian rubles is also the parent company’s functional currency.
For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currencies of the main Russian and European subsidiaries of the Group are the Russian ruble and euro, respectively. The U.S. dollar is the functional currency of other main international operations of the Group. The Group uses the direct method of consolidation and on disposal of a foreign operation, the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method.
Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions.Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The following table presents the exchange rates for the functional and operating currencies at various subsidiaries, other than the presentation currency:
| Rates at | Average exchange rates* for the years ended | |||||||||||||||||||||||
Currency | December 31, 2017 | December 31, 2016 | December 31, 2015 | December 31, 2017 | December 31, 2016 | December 31, 2015 | ||||||||||||||||||
U.S. dollar | 57.60 | 60.66 | 72.88 | 58.35 | 67.03 | 60.96 | ||||||||||||||||||
Euro | 68.87 | 63.81 | 79.70 | 65.90 | 74.23 | 67.78 | ||||||||||||||||||
The majority of the balances and operations not already denominated in the presentation currency were denominated in the U.S. dollar and euro. The Russian ruble is not a convertible currency outside the territory of Russia. Official exchange rates are determined daily by the Central Bank of Russia (“CBR”) and are generally considered to be a reasonable approximation of market rates.
On consolidation, the assets and liabilities of foreign operations are translated into rubles at the rate of exchange prevailing at the reporting date and their statements of profit (loss) and other comprehensive income (loss) are translated at the average exchange rate for the period. The exchange differences arising on translation for consolidation are recognised in OCI. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognised in profit or loss.
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date.
The Group classifiesnon-current assets (or disposal group) as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Suchnon-current assets (or disposal group) classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups). For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active program to locate a buyer and complete the plan must have been initiated.
Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. Assets and liabilities classified as held for sale are presented separately as current items in the consolidated statement of financial position.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and:
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the consolidated statement of profit (loss) and other comprehensive income (loss).
Mineral licenses acquired separately are measured on initial recognition at cost. The cost of mineral licenses acquired in a business combination is their fair value at the date of acquisition. Mineral licenses are amortised under a unit of production basis over proved and probable reserves of the relevant area.
In order to calculate proved and probable reserves, estimates and assumptions are used about a range of geological, technical and economic factors, including but not limited to quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand, commodity prices and exchange rates. There are numerous uncertainties inherent in estimating proved and probable reserves, and assumptions that are valid at the time of estimation may change significantly when new information becomes available.
The Group established a policy according to which internal mining engineers review proved and probable reserves annually. This policy does not change the Group’s approach to the measurement of proved and probable reserves as of their acquisition dates as part of business combinations that involve independent mining engineers. The Group’s proved and probable reserve estimates as of the reporting date were made by internal mining engineers and the majority of the assumptions underlying these estimates had been previously reviewed and verified by independent mining engineers.
Property, plant and equipment and construction in progress are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the rehabilitation provision, and, for qualifying assets (where relevant), borrowing costs and other costs incurred in connection with the borrowings. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.
When significant parts of property, plant and equipment are required to be replaced at intervals, the Group depreciates them separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. Where a separately depreciated asset, or part of an asset, is replaced, the expenditure is capitalised. Where part of the asset was not separately considered as a component and therefore not depreciated separately, the replacement value adjusted for prices inflation is used to estimate the carrying
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
amount of the replaced asset(s) which is immediately written off. All other repair and maintenance costs are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) as incurred.
The capitalised value of a finance lease is also included in property, plant and equipment. The present value of the expected cost for the rehabilitation of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met.
Inventories planned to be used for construction and spare parts with useful lives over one year are recorded within property, plant and equipment.
Mining assets and processing plant and equipment
Mining assets and processing plant and equipment are those assets, including construction in progress, which are intended to be used only for the needs of a certain mine or field, and upon full extraction exhausting of the reserves of such mine or the field, these assets cannot be further used for any other purpose without a capital reconstruction.
Items of production mines are stated at cost, less accumulated depletion and accumulated impairment losses, if any.
Costs of developing new underground mines are capitalized. Underground development costs, which are costs incurred to make the mineral physically accessible, include costs to prepare property for shafts, driving main entries for ventilation, haulage, personnel, construction of airshafts, roof protection and other facilities. Additionally, interest expense subject to allocation to the cost of developing mining properties and to constructing new facilities is capitalized until assets are ready for their intended use.
Exploration and evaluation activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of identified proved and probable reserves. Once the legal right to explore has been acquired, exploration and evaluation expenditure is charged to profit or loss as incurred, unless the Group concludes that a future economic benefit is more likely than not to be realized.
As part of its surface mining operations, the Group incurs stripping costs both during the development phase and production phase of its operations. Stripping costs incurred in the development phase of a mine, before the production phase commences, are capitalized as part of cost of constructing the mine. In general case, the capitalization of development stripping costs ceases when the mine is commissioned and ready for use as intended by management. Stripping costs undertaken during the production phase of mine are charged to profit and loss as cost of sales as incurred.
In some cases, the further development of a mine may require stripping operations, equivalent by scale to those that were incurred in the development phase of a mine. In such cases, production stripping costs are capitalized similarly to the capitalization of costs during the development phase of a mine.
Stripping costs incurred in the production phase are capitalized, if all of the following criteria according toIFRIC 20 Stripping Costs in the Production Phase of a Surface Mine are satisfied:
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
When mining assets and processing plant and equipment are placed in production, the applicable capitalized costs, including mine development costs, are depleted using theunit-of-production method at the ratio of tonnes of mineral mined or processed to the estimated proved and probable mineral reserves that are expected to be mined during the estimated lives of the mines. Capitalized production stripping costs are also depleted using theunit-of-production method on a basis consistent with the mine production and reserves to which they relate.The unit-of-production method is used for the underground mine development structure costs as their useful lives coincide with the estimated lives of mines, provided that all repairs and maintenance are timely carried out.
A decision to abandon, reduce or expand activity on a specific mine is based upon many factors, including general and specific assessments of mineral reserves, anticipated future mineral prices, anticipated costs of developing and operating a producing mine, the expiration date of mineral licenses, and the likelihood that the Group will continue exploration on the mine. Based on the results at the conclusion of each phase of an exploration program, properties that are not economically feasible for production arere-evaluated to determine if future exploration is warranted and that carrying values are appropriate. The ultimate recovery of these costs depends on the discovery and development of economic ore reserves or the sale of the companies owning such mineral rights.
Other property, plant and equipment
Capitalized production costs for internally developed assets include material, direct labor costs, and allocated material and manufacturing direct overhead costs. When construction activities are performed over an extended period, borrowing costs incurred in connection with the borrowing of funds are capitalized.Construction-in-progress and equipment held for installation are not depreciated until the constructed or installed asset is substantially ready for its intended use.
Property, plant and equipment are depreciated using the straight-line method, apart from railway of the Elga coal deposit which is depreciated using the units of production method as discussed in (u) Significant accounting judgements, estimates and assumptions). Upon sale or retirement, the acquisition or production cost and related accumulated depreciation are removed from the consolidated statement of financial position and any gain or loss is included in the consolidated statement of profit (loss) and other comprehensive income (loss).
The following useful lives are used as a basis for calculating depreciation:
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The determination of whether an arrangement is (or contains) a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
A lease is classified at the inception date as a finance lease or an operating lease. A lease that transfers substantially all the risks and rewards incidental to ownership to the Group is classified as a finance lease.
Finance leases are capitalised at the commencement of the lease at the inception date fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the consolidated statement of profit (loss) and other comprehensive income (loss).
A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term.
An operating lease is a lease other than a finance lease. Operating lease payments are recognised as an operating expense in the consolidated statement of profit (loss) and other comprehensive income (loss) on a straight-line basis over the lease term.
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (a qualifying asset) are capitalised as part of the cost of the respective asset. Borrowing costs consist of interest including exchange differences arising from foreign currency borrowings and other costs that an entity incurs in connection with the borrowing of funds.
Where funds are borrowed specifically to finance a project, the amount capitalised represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalised is calculated using a weighted average of rates applicable to relevant general borrowings of the Group during the period.
According to IAS 23Borrowing Costs, borrowing costs may include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Foreign exchange differences on borrowings directly attributable to the acquisition, construction or production of a qualifying asset are considered by the Group to be eligible for capitalization in the amount of difference between actual amount of interest costs and potential amount of interest costs calculated using a weighted average of rates applicable to ruble-nominated borrowings of the Group during the period. All other borrowing costs are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) in the period in which they are incurred.
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses.
Intangible assets with determinable useful lives are amortised using the straight-line method over their estimated period of benefit, ranging from two to sixteen years.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Initial recognition and measurement
Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables,held-to-maturity investments,available-for-sale (AFS) financial assets, or as derivatives. All financial assets are recognised initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in four categories:
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Financial assets at fair value through profit or loss are carried in the consolidated statement of financial position at fair value with net changes in fair value presented as finance costs (negative net changes in fair value) or finance income (positive net changes in fair value) in the consolidated statement of profit (loss) and other comprehensive income (loss).
Loans and receivables
This category is the most relevant to the Group. Loans and receivables arenon-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the consolidated statement of profit (loss) and other comprehensive income (loss). The losses arising from impairment are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) in finance costs for loans and in other operating expenses for receivables.
This category generally applies to trade and other receivables (Note 13).
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
AFS financial assets
AFS financial assets include equity investments and debt securities. Equity investments classified as AFS are those that are neither classified as held for trading nor designated at fair value through profit or loss. Debt securities in this category are those that are intended to be held for an indefinite period of time and that may be sold in response to needs for liquidity or in response to changes in the market conditions.
After initial measurement, AFS financial assets are subsequently measured at fair value with unrealised gains or losses recognised in OCI and credited to the AFS reserve until the investment is derecognised, at which time, the cumulative gain or loss is recognised in other operating income, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the consolidated statement of profit (loss) and other comprehensive income (loss) in finance costs. Interest earned whilst holding AFS financial assets is reported as interest income using the EIR method.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when:
Impairment of financial assets
Further disclosures relating to impairment of financial assets are also provided in the following notes:
The Group assesses, at each reporting date, whether there is objective evidence that a financial asset or a group of financial assets is impaired. An impairment exists if one or more events that has occurred since the initial recognition of the asset (an incurred “loss event”), has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the debtors or a group of debtors is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganisation and observable data indicating that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.
Financial assets carried at amortised cost
For financial assets carried at amortised cost, the Group first assesses whether impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Group’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, financial guarantee contracts and derivative financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. Gains or losses on liabilities held for trading are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IAS 39Financial Instruments Recognition and Measurement are satisfied.
Loans and borrowings
This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the consolidated statement of profit (loss) and other comprehensive income (loss). This category generally applies to interest-bearing loans and borrowings (Note 11).
Financial guarantee contracts
Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognised less cumulative amortisation.
Put Options Written onNon-controlling Interests
The Group initially measures a financial liability at the present value of the redemption amount in the parent’s consolidated financial statements for written puts onnon-controlling interests, therefore, when the Group grantsnon-controlling interests a put option to sell part or all of their interests in a subsidiary during a certain period, on the date of grant, thenon-controlling interests are classified as a financial liability. The Group remeasures the financial liability at the end of each reporting period based on the estimated present value of the consideration to be transferred upon the exercise of the put option. The respective finance cost is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) within finance costs.
Call Options Written on preferred shares
In the consolidated financial statements the Group initially measures a financial liability for call options granted in respect of preferred shares at fair value. Determining the fair value of the call options at the recognition date is subject to judgment. The Group calculated the fair value of call options using mix of the Black-Scholes option pricing model and model of Asian options. The models require input of assumptions, including expected volatility, expected term, risk-free interest rate and dividend yield and other subjective assumptions. The Group remeasures the financial liability at the end of each reporting period at fair value. The respective finance cost or income is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) within finance costs or finance income.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).
The Group uses derivative financial instruments, such as cross currency swap and cross currency option. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
For the years ended December 31, 2017, 2016 and 2015, the Group did not have any derivatives designated as hedging instruments.
Inventories are measured at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and selling expenses.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The cost of inventories is determined under the weighted average cost method, and includes all costs in bringing the inventory to its present location and condition. The elements of costs include direct material, labor and allocable material and manufacturing overhead.
Costs of production in process and finished goods include the purchase costs of raw materials and conversion costs such as direct labor and allocation of fixed and variable production overheads. Raw materials are valued at a purchase cost inclusive of freight and other shipping costs.
Coal and iron ore inventory costs include direct labor, supplies, depreciation of equipment, depletion of mining assets and amortisation of licenses to use mineral reserves, mine operating overheads and other related costs. Operating overheads are charged to expenses in the periods when the production is temporarily paused or abnormally low.
Further disclosures relating to impairment ofnon-current assets are also provided in the following notes:
The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. The Group’s CGUs represent single entities with one component of business in each case. As of December 31, 2017, the Group performed the impairment testing for the following number of CGUs by segments: Steel — 4, Mining — 7 and Power — 2.
In assessing value in use, the Group uses assumptions that include estimates regarding the discount rates, growth rates and expected changes in selling prices, sales volumes and operating costs, as well as capital expenditures and working capital requirements during the forecasted period. The estimated future cash flows expected to be generated by the asset, when the quoted market prices are not available, are discounted to their present value using apre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. The growth rates are based on the Group’s growth forecasts, which are largely in line with industry trends. Changes in selling prices and direct costs are based on historical experience and expectations of future changes in the market. In determining fair value less costs of disposal, recent market transactions are taken into account.
The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.
For CGUs involved in mining activity future cash flows include estimates of recoverable minerals that will be obtained from proved and probable reserves, mineral prices (considering current and historical prices, price
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
trends and other related factors), production levels, capital and reclamation costs, all based on the life of mine models prepared by the Group’s engineers.
Impairment losses of continuing operations are recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).
For impaired assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase.
Goodwill is tested for impairment annually as of December 31 and when circumstances indicate that the carrying value may be impaired.
Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods.
Cash and cash equivalents in the consolidated statement of financial position comprise cash at banks and on hand and short-term deposits with an original maturity of three months or less, which are subject to an insignificant risk of changes in value.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above, net of outstanding bank overdrafts as they are considered an integral part of the Group’s cash management.
General
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, including legal or tax proceedings’ obligations, and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the consolidated statement of profit (loss) and other comprehensive income (loss), net of any reimbursment.
If the effect of the time value of money is material, provisions are discounted using a currentpre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Rehabilitation provision
Mine rehabilitation costs will be incurred by the Group either while operating, or at the end of the operating life of the Group’s facilities and mine properties. The Group assesses its mine rehabilitation provision at each reporting date. The Group recognises a rehabilitation provision where it has a legal and constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. The nature of these restoration activities includes: dismantling and removing structures; rehabilitating mines and tailings dams; dismantling operating facilities; closing plant and waste sites; and restoring, reclaiming and revegetating affected areas.
The obligation generally arises when the asset is installed or the ground/environment is disturbed at the mining operation’s location. When the liability is initially recognised, the present value of the estimated costs is capitalised by increasing the carrying amount of the related mining assets to the extent that it was incurred as a result of the development/construction of the mine.
Changes in the estimated timing of rehabilitation or changes to the estimated future costs are dealt with prospectively by recognising an adjustment to the rehabilitation provision and a corresponding adjustment to the asset to which it relates, if the initial estimate was originally recognised as part of an asset measured in accordance with IAS 16Property, Plant and Equipment.
Any reduction in the rehabilitation provision and, therefore, any deduction from the asset to which it relates, may not exceed the carrying amount of that asset. If it does, any excess over the carrying value is taken immediately to the consolidated statement of profit (loss) and other comprehensive income (loss).
Over time, the discounted liability is increased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. The periodic unwinding of the discount is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss) as part of finance costs.
For closed sites, changes to estimated rehabilitation costs are recognised immediately in the consolidated statement of profit (loss) and other comprehensive income (loss).
Environmental expenditures and liabilities
Environmental expenditures that relate to current or future revenues are expensed or capitalised as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future earnings are expensed. Liabilities for environmental costs are recognised when aclean-up is probable and the associated costs can be reliably estimated. Generally, the timing of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The amount recognised is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognised is the present value of the estimated future expenditure.
Defined benefit pension and other post-retirement plans
The Group has a number of defined benefit pension plans and other long-term benefits that cover the majority of production employees.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Benefits under these plans are primarily based upon years of service and average earnings. The Group accounts for the cost of defined benefit plans and other long-term benefits using the projected unit credit method. Under this method, the cost of providing pensions is charged to the consolidated statement of profit (loss) and other comprehensive income (loss), so as to attribute the total pension cost over the service lives of employees in accordance with the benefit formula of the plan.
The Group’s obligation in respect of defined retirement benefit plans and other long-term benefits is calculated separately for each defined benefit plan and other long-term benefit plan by discounting the amounts of future benefits that employees have already earned through their service in the current and prior periods. The discount rate applied represents the yield at the year end on highly rated long-term bonds.
Where there is a change in actuarial assumptions, the resulting actuarial gains and losses are recognised directly in other comprehensive income.
For unfunded plans, the Group recognizes a pension liability, which is equal to the projected benefit obligation. For funded plans, the Group offsets the fair value of the plan assets with the projected benefit obligations and recognizes the net amount of pension liability. The market value of plan assets is measured at each reporting date.
State pension fund
The Group’s Russian subsidiaries are legally obligated to make defined contributions to the Russian Pension Fund, managed by the Russian Federation Social Security (a defined contribution plan financed on apay-as-you-go basis). The Group’s contributions to the Russian Pension Fund relating to defined contribution plans are charged to income in the year, to which they relate.
The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported carrying amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the amounts of revenues and expenses recognised during the reporting period. Estimates and assumptions are continually evaluated and are based on the Group’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
Judgments
In the process of applying the Group’s accounting policies, management has made the following judgments, which have the most significant effect on the amount recognised in the consolidated financial statements.
Capitalization of interest related to the Elga Coal Deposit and Railway Construction
In 2013 and 2014, Elgaugol OOO (“Elgaugol”) and the Russian State Corporation “Bank for Development and Foreign Economic Affairs” (“VEB”) signed credit agreements for financing of the Elga coal project approved by the VEB’s Supervisory Board in September 2013. The use of proceeds under these facilities is limited to the development of the Elga coal project. Borrowing costs under these VEB facilities that are directly
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
attributable to the construction of the Elga coal project are capitalized. Borrowing costs consist of interest including exchange differences arising from revaluation of foreign currency borrowings and other costs that the Group incurs in connection with the debt servicing.
Railway depreciation method
In 2015, the Group commenced to depreciate the railway of the Elga coal deposit using units of production method. In applying the units of production method, depreciation is normally calculated based on produced and delivered tonnes in the period as a percentage of total expected tonnes to be produced and delivered in current and future periods over the Elga coal deposit life cycle. The Group’s analysis has shown that the consumption of the economic benefits of the asset is linked to production and delivery of coal. The Group assesses the total or ultimate railway capacity in tonnes at least at each financial year end and, if expectations differ from previous estimates, the changes will be accounted for as a change in an accounting estimate in accordance with IAS 8Accounting Policies, Changes in Accounting Estimates and Errors.
DEMP property complex
On June 25, 2016, by the decree of the Council of Ministers of the self-proclaimed People’s Republic of Donetsk, the State Enterprise “Yuzovsky metallurgical plant” was established on the basis of the property complex of the Group’s subsidiary Donetsk Electrometallurgical Plant (“DEMP”). The Group’s ability to manage and control the assets of the DEMP property complex is restricted by this decree. The Group concluded that the assets included in the DEMP’s property complex do not meet the recognition criteria and derecognized these assets in the consolidated financial statements.
The DEMP’s assets were fully impaired based on the results of impairment tests as of January 1, 2014 and December 31, 2014 due to conservation of production since 2013. The loss of control over the assets of nil carrying value has no impact on the financial result for the years ended December 31, 2016 and 2017.
Principal vs agent arrangements
The Group makes significant judgment on gross or net revenue recognition. The Group evaluates the relevant facts and circumstances and takes into consideration the following factors in determining whether to recognize revenue on a gross basis:
Otherwise, revenues are reported net when the Group performs as an agent or a broker without assuming the risks and rewards of ownership of goods. The evaluations of these factors, which at times can be contradictory, are subject to significant judgment and subjectivity. In the situation when the Group acts as a supplier and as a
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
buyer with the same counterparty, the Group analyzes the respective purchase and sales agreements to identify whether these transactions were concluded in contemplation with each other and, therefore, should be combined for accounting purposes deferring the revenue recognition to the point when the earnings process has culminated.
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below or in the related accounting policy note. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market change or circumstances arising beyond the control of the Group.
In particular, the Group has identified a number of areas where significant estimates and assumptions are required. Further information on each of these areas and how they impact the various accounting policies are described with the associated accounting policy note within the related qualitative and quantitative note as described below.
Deferred tax assets and uncertain tax positions
Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits and the existence of taxable temporary differences (Note 20). Various factors are considered to assess the probability of the future utilization of deferred tax assets for individual subsidiaries and for the consolidated group of taxpayers, including past operating results, operational plans for not longer than five years as this term is considered reliable and accurate for forecast, same assumptions for operational plans as used for determination of the expected future cash flows from the cash generating units, financial plans based on historical data and expectation built on the debt portfolio, terms of the expiration of tax losses carried forward depending on respective tax legislation, and tax planning strategies based on changes in tax regulation for tax losses offsetting for 2018-2020. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the Group’s financial position, results of operations and cash flows may be affected. In the event that the assessment of future utilization of deferred tax assets must be changed, this effect is recognised in the consolidated statement of profit (loss) and other comprehensive income (loss).
The carrying amount of deferred tax assets is reviewed at each reporting date and is adjusted to reflect the likelihood that the estimated taxable profit and taxable temporary differences will be sufficient to recover the asset in whole or in part.
Impairment of property, plant and equipment and othernon-current assets
The Group assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Group makes an estimate of the asset’s recoverable amount. An impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length for similar assets or observable market prices less
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
incremental costs for disposing of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using apre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets.
Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the industry, changes in cost of capital, changes in the future availability of financing, technological obsolescence, and other changes in circumstances that indicate that impairment exists. The determination of the recoverable amount of acash-generating unit involves the use of estimates by management. Methods used to determine the value in use include discounted cash flow-based methods, which require the Group to make an estimate of the expected future cash flows from thecash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. These estimates, including the methodologies used, may have a material impact on the value in use and, ultimately, the amount of any impairment (Note 18).
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis and when circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. More details of the assumptions used in estimating the value in use of the cash-generating units to which goodwill is allocated are provided in Note 18.
Useful lives of items of property, plant and equipment
The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8Accounting Policies, Changes in Accounting Estimates and Errors. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.
Mineral reserves
Mineral reserves and the associated mine plans are a material factor in the Group’s computation of a depletion charge. Estimation of reserves involves some degree of uncertainty. The uncertainty depends mainly on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of this data, which also requires use of subjective judgment and development of assumptions. Mine plans are periodically updated which can have a material impact on the depletion charge for the period. More details are provided in Note 3(i).
Fair value of financial instruments
Where the fair value of financial assets and financial liabilities recorded in the consolidated statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques, including discounted cash flow models and other specific models. The inputs to these models are taken from observable markets where possible, but when these are not available, a degree of judgment is required
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
in establishing fair values. The judgments include considerations of inputs such as dividend yield, terms of redemption, liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments (Note 10).
Provisions
The Group is subject to various legal proceedings, disputes and claims, including regulatory discussions related to the Group’s business, licenses, tax positions and the outcomes are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Unanticipated events or changes in these factors may require the Group to increase or decrease the amount recorded or to be recorded for a matter that has not been previously recorded because it was not considered probable (Note 23).
Pensions and other post-employment benefits
The cost of defined benefit pension plans and other post-employment benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation and other long-term benefit plans are highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. More details are provided in Note 22.
Rehabilitation provisions
The Group reviews rehabilitation provisions at each reporting date and adjusts them to reflect the current best estimate. Rehabilitation provisions are recognised in the period in which they arise and are stated at the best estimate of the present value of estimated future costs. These estimates require extensive judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations and remediation practices. Changes in the estimated timing of rehabilitation or changes to the estimated future costs are dealt with prospectively by recognizing an adjustment to the rehabilitation provision and a corresponding adjustment to the asset to which it relates, if the initial estimate was originally recognised as part of an asset measured in accordance with IAS 16Property, Plant and Equipment (Note 16).
Impairment of financial assets
The Group makes allowances for doubtful receivables to account for estimated losses resulting from the inability of customers to make required payments. When evaluating the adequacy of an allowance for doubtful accounts, management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historicalwrite-off experience, customer creditworthiness and changes in payment terms. Changes in the economy, industry or specific customer conditions may require adjustments to the allowance for doubtful accounts recorded in the consolidated financial statements (Note 13).
Determining net realizable value of inventories
The Group makes write-downs for obsolete and slow-moving raw materials and spare parts. In addition, finished goods of the Group are carried at net realizable value (Note 12). Estimates of net realizable value of
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
finished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events confirm conditions existing at the end of the period.
For other judgments, estimates and assumptions and details refer to:
Certain reclassifications have been made to the prior periods’ consolidated financial statements to conform to the current year presentation. Such reclassifications affect the presentation of certain items in the consolidated statement of financial position, consolidated statement of profit (loss) and other comprehensive income (loss) and consolidated statement of cash flows and have no impact on net income or equity.
The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2017. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The nature and the effect of these changes are described below.
Amendments to IAS 7 Statement of Cash Flows: Disclosure Initiative
The amendments require entities to provide disclosure of changes in their liabilities arising from financing activities, including both changes arising from cash flows andnon-cash changes (such as foreign exchange gains or losses). The Group has provided the information for the current and comparative periods in Note 15.
Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses
The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of deductible temporary difference related to unrealized losses. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group applied amendments retrospectively. However, their application did not affect the Group’s financial position and performance as the Group has no deductible temporary differences or assets that are in the scope of the amendments.
Annual Improvements Cycle — 2014-2016
Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12
The amendments clarify that the disclosure requirements in IFRS 12, other than those in paragraphs B10–B16, apply to an entity’s interest in a subsidiary, a joint venture or an associate (or a portion of its interest in a joint venture or an associate) that is classified (or included in a disposal group that is classified) as held for sale.
The amendments and improvements described above had no significant impact on the Group’s financial position and performance of the Group or the disclosures in the consolidated financial statements.
Standards issued but not effective
The standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group’s financial statements are discussed below. The Group intends to adopt these standards and amendments, if applicable, when they become effective.
Amendments to IAS 40 Transfers of Investment Property
The amendments effective January 1, 2018 clarify when an entity should transfer property, including property under construction or development into, or out of investment property.
IFRIC 22 Foreign Currency Transactions and Advance Consideration
The Interpretation effective January 1, 2018 clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of anon-monetary asset ornon-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises thenon-monetary asset ornon-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine the transaction date for each payment or receipt of advance consideration.
Annual improvements to IFRS 2014-2016 cycle (issued in December 2016)
This annual improvements package amended two standards:
IFRS 1 First-time Adoption of International Financial Reporting Standards. Short-term exemptions in paragraphsE3-E7 of IFRS 1 were deleted, because they have now served their intended purpose.
IAS 28 Investments in Associates and Joint Ventures. The amendment clarified that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is a venture capital organisation, or other qualifying entity, is available for each investment in an associate or joint venture on aninvestment-by-investment basis, upon initial recognition.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The amendments described above and effective January 1, 2018 had no significant impact on the Group’s financial position and performance of the Group or the disclosures in the consolidated financial statements. The Group has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.
The Group is in the process of assessing the impact of the adoption of the pronouncements listed below on the Group’s consolidated financial statements:
The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 and does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments.
The Interpretation specifically addresses the following:
An entity must determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty should be followed. The interpretation is effective for annual reporting periods beginning on or after January 1, 2019, but certain transition reliefs are available. The Group will apply interpretation from its effective date. Since the Group operates in a complex multinational tax environment, applying the Interpretation may affect its consolidated financial statements and the required disclosures. In addition, the Group may need to establish processes and procedures to obtain information that is necessary to apply the Interpretation on a timely basis.
The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. The IASB has deferred the effective date of these amendments indefinitely, but an entity that early adopts the amendments must apply them prospectively. The Group will apply these amendments when they are effective.
IFRS 9 Financial Instruments
In July 2014, the IASB issued the final version of IFRS 9Financial Instruments. The final version(“IFRS 9”), is measured at fair value with the changes in fair value recognised in the consolidated statement of IFRS 9 replaces IAS 39Financial Instruments: Recognitionprofit (loss) and Measurement,other comprehensive income.
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interests) and any previous interest held over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group re-assesses whether it has correctly identified all of the assets acquired and all previous versions of
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
Where goodwill has been allocated to a cash-generating unit (CGU) and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (b) | Investments in associates |
IFRS 9. IFRS 9 brings together the requirements for the classification and measurement, impairment and hedge accounting of financial instruments. In respect of impairment, IFRS 9 replaces the ‘incurred loss’ model used in IAS 39 with a new ‘expected credit loss’ model that will require a more timely recognition of expected credit losses. Except for hedge accounting, retrospective applicationAn associate is required but providing comparative information is not compulsory. The standard is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted.
The Group plans to adopt the new standard on the required effective date and will not restate comparative information. During 2017,an entity over which the Group has performed a detailed impact assessmentsignificant influence. Significant influence is the power to participate in the financial and operating policy decisions of all aspectsthe investee, but is not control or joint control over those policies.
The considerations made in determining significant influence are similar to those necessary to determine control over subsidiaries.
The Group’s investments in its associate are accounted for using the equity method.
Under the equity method, the investment in an associate is initially recognised at cost. The carrying amount of IFRS 9. This assessmentthe investment is based on currently available information and may be subjectadjusted to recognise changes arising from further reasonable and supportable information being made availablein the Group’s share of net assets of the associate since the acquisition date. Goodwill relating to the Groupassociate is included in 2018the carrying amount of the investment and is not tested for impairment separately.
The consolidated statement of profit (loss) and other comprehensive income reflects the Group’s share of the results of operations of the associate. Any change in OCI of those investees is presented as part of the Group’s OCI movements. In addition, when there has been a change recognised directly in the equity of the associate, the Group will adopt IFRS 9. Overall,recognises its share of any changes, when applicable, in the statement of changes in equity. Unrealised gains and losses resulting from transactions between the Group does not expect aand the associate are eliminated to the extent of the interest in the associate.
The aggregate of the Group’s share of profit or loss of an associate is shown on the face of the consolidated statement of profit (loss) and other comprehensive income outside operating profit and represents profit or loss after tax andnon-controlling interests in the subsidiaries of the associate.
The financial statements of the associate are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group.
After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the investment in associate and its carrying value, and then recognises the loss as ‘Share of profit (loss) of associates’ in the consolidated statement of profit (loss) and other comprehensive income.
Upon loss of significant impact oninfluence over the associate, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the retained investment and proceeds from disposal is recognised in the consolidated statement of profit (loss) and other comprehensive income.
| (c) | Current versus non-current classification |
The Group presents assets and liabilities in the consolidated statement of financial position except for the effect of adjustments to amortised cost of the financial liability due to restructuring as discussed below.based on current/non-current classification. An asset is current when it is:
(a) Classification and measurement
The Group does not expect a significant impact on its statement of financial position or equity on applying the classification and measurement requirements of IFRS 9. It expects to continue measuring at fair value all financial assets currently held at fair value.
Loans as well as trade receivables are held to collect contractual cash flows and are expected to give rise to cash flows representing solely payments of principal and interest. The Group analysed the contractual cash flow characteristics of those instruments and concluded that they meet the criteria for amortised cost measurement under IFRS 9. No reclassification for these instruments is required.
IFRS 9 does not require reclassification of the Group’s financial liabilities (including interest-bearing loans and borrowings and other financial liabilities) compared to IAS 39. However, as of January 1, 2018, the Group plans to recalculate its estimates of the present value of the cash outflows under borrowings restructured before January 1, 2018 (for restructurings accounted for as debt modifications) using original effective interest rates as prescribed by IFRS 9. Under IAS 39, such modifications were accounted for at revised effective interest rates. As of January 1, 2018, these adjustments are expectedExpected to be recognizedrealised or intended to be sold or consumed in the amount of RUB 2,062 million to increase interest-bearing loans and borrowings, and RUB 412 million to decrease deferred tax liabilities with the corresponding decrease of RUB 1,650 million recognized in accumulated deficit.normal operating cycle;
In summary, the impact of IFRS 9 adoption as of January 1, 2018 is expected to be as follows:
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
(b) ImpairmentHeld primarily for the purpose of trading;
Expected to be realised within twelve months after the reporting period; or
Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.
All other assets are classified as non-current.
IFRS 9 requiresA liability is current when:
It is expected to be settled in the Groupnormal operating cycle;
It is held primarily for the purpose of trading;
It is due to record expected credit losses on allbe settled within twelve months after the reporting period; or
There is no unconditional right to defer the settlement of its debt securities, loans and trade receivables, either on a12-month or lifetime basis. the liability for at least twelve months after the reporting period.
The Group will applyclassifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.
| (d) | Fair value measurement |
Fair value is the simplified approach and record lifetime expected lossesprice that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on all trade receivables. The Group has determinedthe presumption that as of January 1, 2018, there is no significant impact of loss allowance on its consolidated statement of financial position.the transaction to sell the asset or transfer the liability takes place either:
IFRS 16 Leases
In January 2016, the IASB issued IFRS 16Leases. IFRS 16 eliminates the classification of leases as either operating leases or finance leases and establishes a single lessee accounting model. The most significant effect of the new requirementsprincipal market for the lessee willasset or liability; or
In the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Group.
The fair value of an increaseasset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in lease assets and financial liabilities. The new standard effective January 1, 2019 replaces the previous leases standard, IAS 17Leases, and the related interpretations.their economic best interest.
The Group plansuses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to apply IFRS 16 starting frommeasure fair value, maximising the respective effective dateuse of relevant observable inputs and tominimising the use the cumulativecatch-up transition methodof unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in IFRS 16 when first applying the Standard. The Group is currently assessing the impact of the standard on the consolidated financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1 — quoted (unadjusted) market prices in active markets for identical assets or liabilities;
Level 2 — valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable;
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Level 3 — valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and expectsliabilities that are recognised in the consolidated financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant impact on its statementto the fair value measurement as a whole) at the end of financial position and equity.each reporting period.
IFRS 15
| (e) | Revenue from contracts with customers |
Revenue from Contracts with Customers.
In May 2014, the IASB issued IFRS 15Revenue from Contracts with Customers. IFRS 15 establishes a single framework for revenue recognition and contains requirements for related disclosures. The new standard supersede IAS 18Revenue, IAS 11Construction Contracts, and the related interpretations on revenue recognition. The standard is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted.
IFRS 15 establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenuecustomers is recognizedrecognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.
IFRS 15 provides presentation and disclosure requirements, which are more detailed than under the current IFRS. The presentation requirements represent a significant changeRevenue from current practice and increase the volume and level of details of disclosures required in the Group’s consolidated financial statements. The Group expects to adopt the new standard from January 1, 2018 using full retrospective method. During 2016, the Group performed a preliminary assessment of IFRS 15, which was continued with a more detailed analysis completed in 2017.
In preparing to adopt IFRS 15, the Group is considering the following:
(a) Variable consideration
Some contracts with customers provide a rightis inflows from sales of return, trade discounts or volume rebates. IFRS 15 requires the estimated variable consideration to be constrained to prevent over-recognition of revenue. The Group does not expectgoods that application of the constraint will result in more revenue being deferred than under current IFRS.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group provides rights of return based on poor quality of product. The Group has no history of significant returns due to higher transportation cost for sending product back to supplier. The Group concluded that, when it adopts IFRS 15, there would not be any significant adjustments based on future returns.
Certain steel and mining traders and producersconstitute ongoing major operations of the Group provide retrospective volume rebatesand is reported as such in the consolidated statement of profit (loss) and other comprehensive income. Inflows from incidental and peripheral operations, net of related costs, are considered gains and are included in other operating income and other income in the consolidated statement of profit (loss) and other comprehensive income.
The following criteria are also applicable to its customers. These amounts may subsequently be repaid in cash toother specific revenue transactions from contracts with customers:
Sales of goods and rendering services
Revenue from the customer or are offset against amounts payable by customer. The Group applied the requirements of IFRS 15 on constraining estimates of variable consideration and concluded that no adjustments to reduce revenue from sale of goods dueand rendering services is recognised when (or as) the Group satisfies a performance obligation by transferring promised goods and services to volume rebates are required.
(b) Warranty obligations
The Group provides warranties to its customers undera customer. An asset is transferred when (or as) the Russian Federation Law requirements. These warranties represent assurance type warranties and do not require to provide any additional service tocustomer obtains control of the Group’s customers. This type of warranties will continue to be accounted for underIAS 37 Provisions, Contingent Liabilities and Contingent Assets, consistent with its current practice.
(c) Principal versus agent considerations
asset. The Group is engaged into contracts for sales of goods which include transportation and freight services. Under certain agreements,In these contracts the Group is responsible for providing shipping services after the date at which control of the goods passes to the customer at the loading port or place. Under IAS 18, the Group recognises such shipping and other freight revenue and accrues the associated costs in full on loading whereas under IFRS 15, freight and transportation services are required to be accounted for as separate performance obligations with revenue recognised over time as the service is rendered. The railway transportation service inside Russia is provided by the carrier Russian Railways JSC. When control is transferred to the customer at a point when goods are accepted by the first carrier the Group will accountaccounts for two separate performance obligations: the obligation to provide goods to the customer and the obligation to arrange the delivery (transportation, freight) of goods to the customer. In these contracts,Revenue is recognised at a point of time when control over the goods passes to the customer (at the loading port, place or after delivery to the first carrier). Revenue related to freight and transportation component is recognised over time as the service is rendered. Revenue from the sale of goods and rendering services is measured at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services, net of returns and allowances, trade discounts, associated sales taxes (VAT) and export duties.
Certain contracts are provisionally priced so that price is not settled until the final price based on the market price for the relevant period is determined. Revenue from these transactions is initially recognised based on related coal market indices. An adjustment to the final price on provisionally priced contracts is recorded in revenue.
Sales of power
In the Power segment (Note 25), revenue is recognised based on unit of power measure (kilowatts) delivered to customers, since at that point revenue recognition criteria are met. The billings are usually done on a monthly basis, several days after each month end.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Variable consideration
If the consideration in a contract includes a variable amount, the Group estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer.
Some contracts with customers provide a right of return, trade discounts or volume rebates. IFRS 15Revenue from Contracts with customers (“IFRS 15”) requires the estimated variable consideration to be constrained to prevent over-recognition of revenue. The application of the constraint does not result in more revenue being deferred than under previous IFRS.
Significant financing component
The Group decided to use the practical expedient provided in IFRS 15, which allows not to adjust the promised amount of consideration for the effects of a significant financing component in the contracts where the Group expects, at contract inception, that the period between the Group’s transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Warranty obligations
The Group provides warranties to its customers under the Russian Federation Law requirements. These warranties represent assurance type warranties and do not require providing any additional service to the Group’s customers. This type of warranties is accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets(“IAS 37”).
Trade receivables
A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies of financial assets in Note 3 (n).
The disclosure of significant accounting judgements relating to revenue from contracts with customers is provided in Note 3 (u).
| (f) | Taxes |
Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date in the countries where the Group operates and generates taxable income.
Uncertain tax positions
The Group’s policy is to comply fully with the applicable tax regulations in the jurisdictions in which its operations are subject to income taxes. The Group’s estimates of current income tax expense and liabilities are calculated assuming that all tax computations filed by the Group’s subsidiaries will be subject to a review or
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
audit by the relevant tax authorities. The Group and the relevant tax authorities may have different interpretations of how regulations should be applied to actual transactions. Such uncertain tax positions are accounted for in accordance with IAS 12Income Taxes(“IAS 12”) and IAS 37. The Group applies single most likely outcome method of uncertain tax positions estimation.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.
Deferred tax liabilities are recognised for all taxable temporary differences, except:
When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised, except:
When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.
In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint arrangements, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred tax assets are re-assessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
Deferred tax relating to items recognised outside profit or loss is recognised in correlation to the underlying transaction either in OCI or directly in equity.
Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (g) | Foreign currencies |
The Group’s consolidated financial statements are presented in Russian rubles to comply with the Law208-FZ. Russian ruble is also the parent company’s functional currency.
For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The functional currencies of the main Russian and European subsidiaries of the Group are the Russian ruble and euro, respectively. The U.S. dollar is the functional currency of other main international operations of the Group. The Group uses the direct method of consolidation and on disposal of a foreign operation; the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method.
| (i) | Transactions and balances |
Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency exchange rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated to the functional currency at the exchange rates as of the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined.
The following table presents the exchange rates for the functional and operating currencies at various subsidiaries, other than the presentation currency:
| Exchange rates* at | Average exchange rates* for the year ended | |||||||||||||||||||
Currency | December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | December 31, 2017 | |||||||||||||||
U.S. dollar | 61.91 | 69.47 | 64.74 | 62.71 | 58.35 | |||||||||||||||
Euro | 69.34 | 79.46 | 72.50 | 73.95 | 65.90 | |||||||||||||||
| (*) | Exchange rates shown in Russian rubles for one currency unit. |
The majority of the balances and operations not already denominated in the presentation currency were denominated in the U.S. dollar and euro. The Russian ruble is not a convertible currency outside the territory of Russia. Official exchange rates are determined daily by the Central Bank of the Russian Federation (“CBR”) and are generally considered to be a reasonable approximation of market rates.
| (ii) | Group companies |
On consolidation, the assets and liabilities of foreign operations are translated into the Russian rubles at the rate of exchange prevailing at the reporting date and their statements of profit (loss) and other comprehensive income are translated at the average exchange rate for the period. The exchange differences arising on translation for consolidation are recognised in OCI. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognised in profit or loss.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the exchange rate as of the reporting date.
| (h) | Non-current assets held for sale and discontinued operations |
The Group classifies non-current assets (or disposal group) as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Such non-current assets (or disposal group) classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell.
The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups). For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset (or disposal group), and an active program to locate a buyer and complete the plan must have been initiated.
Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. Assets and liabilities classified as held for sale are presented separately as current items in the consolidated statement of financial position.
A disposal group qualifies as discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and:
Represents a separate major line of business or geographical area of operations;
Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
Is a subsidiary acquired exclusively with a view to resale.
Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the consolidated statement of profit (loss) and other comprehensive income.
| (i) | Mineral licenses |
The Group’s mining segment production activities are located within Russia. The Group’s mineral reserves and deposits are situated on the land belonging to government and regional authorities. Mining minerals requires a subsoil license from the state authorities with respect to identified mineral deposits. The Group obtains licenses from such authorities and pays certain taxes to explore and produce from these deposits. These licenses expire up to 2038, with the most significant licenses expiring between 2024 and 2033, and management believes that they may be extended at the initiative of the Group without substantial cost, based on previous experience. Management intends to extend such licenses for deposits expected to remain productive subsequent to their license expiry dates.
Mineral licenses acquired separately are measured on initial recognition at cost. The cost of mineral licenses acquired in a business combination is their fair value at the date of acquisition. Mineral licenses are amortised under a unit of production basis over proved and probable reserves of the relevant area.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
In order to calculate proved and probable reserves, estimates and assumptions are used about a range of geological, technical and economic factors, including but not limited to quantities, grades, production techniques, recovery rates, production costs, transport costs, commodity demand, commodity prices and exchange rates. There are numerous uncertainties inherent in estimating proved and probable reserves, and assumptions that are valid at the time of estimation may change significantly when new information becomes available.
The Group established a policy according to which internal mining engineers review proved and probable reserves annually. This policy does not change the Group’s approach to the measurement of proved and probable reserves as of their acquisition dates as part of business combinations that involve independent mining engineers. The Group’s proved and probable reserve estimates as of the reporting date were made by internal mining engineers and the majority of the assumptions underlying these estimates had been previously reviewed and verified by independent mining engineers.
The carrying values of the mineral licenses were reduced proportionate to the depletion of the respective mineral reserves at each deposit related to mining and production of reserves adjusted for the reserves re-measurement and purchase accounting effects. Reduction in carrying values of the mineral licenses is included in the amortisation charge proportional to the depletion for the period within the cost of sales in the consolidated statement of profit (loss) and other comprehensive income. No residual value is assumed in the mineral license valuation.
| (j) | Property, plant and equipment |
Property, plant and equipment and construction in progress are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into operation, the initial estimate of the rehabilitation provision, and, for qualifying assets (where relevant), borrowing costs and other costs incurred in connection with the borrowings. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.
When significant parts of property, plant and equipment are required to be replaced at intervals, the Group depreciates them separately based on their specific useful lives. Likewise, when a major inspection is performed, its cost is recognised in the carrying amount of the property, plant and equipment as a replacement if the recognition criteria are satisfied. Where a separately depreciated asset, or part of an asset, is replaced, the expenditure is capitalised. Where part of the asset was not separately considered as a component and therefore not depreciated separately, the replacement value adjusted for prices inflation is used to estimate the carrying amount of the replaced asset(s) which is immediately written off. All other repair and maintenance costs are recognised in the consolidated statement of profit (loss) and other comprehensive income as incurred.
The capitalised value of right-of-use assets is also included in property, plant and equipment. The present value of the expected cost for the rehabilitation of an asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met.
Inventories planned to be used for construction and spare parts with useful lives over one year are recorded within property, plant and equipment.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Mining assets and processing plant and equipment
Mining assets and processing plant and equipment are those assets, including construction in progress, which are intended to be used only for the needs of a certain mine or field, and upon full extraction exhausting of the reserves of such mine or the field, these assets cannot be further used for any other purpose without a capital reconstruction.
Items of production mines are stated at cost, less accumulated depreciation and accumulated impairment losses, if any.
Costs of developing new underground mines are capitalized. Underground development costs, which are costs incurred to make the mineral physically accessible, include costs to prepare property for shafts, driving main entries for ventilation, haulage, personnel, construction of airshafts, roof protection and other facilities. Additionally, interest expense subject to allocation to the cost of developing mining properties and to constructing new facilities is capitalized until assets are ready for their intended use.
Exploration and evaluation activity involves the search for mineral resources, the determination of technical feasibility and the assessment of commercial viability of identified proved and probable reserves. Once the legal right to explore has been acquired, exploration and evaluation expenditure is charged to profit or loss as incurred, unless the Group concludes that a future economic benefit is more likely than not to be realized.
As part of its surface mining operations, the Group incurs stripping costs both during the development phase and production phase of its operations. Stripping costs incurred in the development phase of a mine, before the production phase commences, are capitalized as part of cost of constructing the mine. In general case, the capitalization of development stripping costs ceases when the mine is commissioned and ready for use as intended by management. Stripping costs undertaken during the production phase of mine are charged to profit and loss as cost of sales as incurred.
In some cases, the further development of a mine may require stripping operations, equivalent by scale to those that were incurred in the development phase of a mine. In such cases, production stripping costs are capitalized similarly to the capitalization of costs during the development phase of a mine.
Stripping costs incurred in the production phase are capitalized, if all of the following criteria according to IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine are satisfied:
| (a) | it is probable that the future economic benefit associated with the stripping activity will flow to the entity; |
| (b) | the entity can identify the component of the ore body for which access has been improved; |
| (c) | the costs relating to the stripping activity associated with that component can be measured reliably. |
When mining assets and processing plant and equipment are placed in production, the applicable capitalized costs, including mine development costs, are depleted using the unit-of-production method at the ratio of tonnes of mineral mined or processed to the estimated proved and probable mineral reserves that are expected to be mined during the estimated lives of the mines. Capitalized production stripping costs are also depleted using the unit-of-production method on a basis consistent with the mine production and reserves to which they relate. The unit-of-production method is used for the underground mine development structure costs as their useful lives coincide with the estimated lives of mines, provided that all repairs and maintenance are timely carried out.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
A decision to abandon, reduce or expand activity on a specific mine is based upon many factors, including general and specific assessments of mineral reserves, anticipated future mineral prices, anticipated costs of developing and operating a producing mine, the expiration date of mineral licenses, and the likelihood that the Group will continue exploration on the mine. Based on the results at the conclusion of each phase of an exploration program, properties that are not economically feasible for production are re-evaluated to determine if future exploration is warranted and that carrying values are appropriate. The ultimate recovery of these costs depends on the discovery and development of economic ore reserves or the sale of the companies owning such mineral rights.
Other property, plant and equipment
Capitalized production costs for internally developed assets include material, direct labor costs, and allocated material and manufacturing direct overhead costs. When construction activities are performed over an extended period, borrowing costs incurred in connection with the borrowing of funds are capitalized. Construction-in-progress and equipment held for installation are not depreciated until the constructed or installed asset is substantially ready for its intended use.
Property, plant and equipment other than mining assets and processing plant and equipment is depreciated using the straight-line method, apart from railway of the Elga coal deposit which is depreciated using the units of production method as discussed in (u) Significant accounting judgements, estimates and assumptions). Upon sale or retirement, the acquisition or production cost and related accumulated depreciation are removed from the consolidated statement of financial position and any gain or loss is included in the consolidated statement of profit (loss) and other comprehensive income.
The following useful lives are used as a basis for calculating depreciation:
Category of asset | Useful economic lives estimates, years | |||
Buildings and constructions | 5-85 | |||
Operating machinery and equipment | 2-30 | |||
Transportation vehicles | 2-25 | |||
Other equipment | 2-15 | |||
| (k) | Leases |
The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Group applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Group recognises lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
Right-of-use assets
The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Right-of-use assets are depreciated on a straight-line basis over the shorter of the lease term and the estimated useful lives of the assets as follows:
Category of asset | Years | |
Buildings and constructions | 2-5 | |
Operating machinery and equipment | 5-10 | |
Transportation vehicles | 2-22 |
The right-of-use assets related to land are depreciated using the straight-line method based on the period of land use (from 2 to 91 years).
The right-of-use assets are also subject to impairment. Refer to the accounting policies in Note 3 (q).
Lease liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating the lease, if the lease term reflects the Group exercising the option to terminate.
In calculating the present value of lease payments, the Group uses its incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments) or a change in the assessment of an option to purchase the underlying asset.
Short-term leases and leases of low-value assets
The Group applies the short-term lease recognition exemption to its short-term leases of machinery and equipment, office and storage facilities (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). The Group also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered to be low value. Lease payments on short-term leases and leases of low-value assets are recognised as expense on a straight-line basis over the lease term.
Sale and leaseback transactions
The Group sells and leases back operating machinery and transportation vehicles. The Group keeps the transferred assets subject to the sale and leaseback transaction on the balance sheet and accounts for amounts received as a financial liability due to intention to excercise repurchase option for the underlying assets set by contracts.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (l) | Borrowing costs |
Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale (a qualifying asset) are capitalised as part of the cost of the respective asset. Borrowing costs consist of interest including exchange differences arising from foreign currency borrowings and other costs that an entity incurs in connection with the borrowing of funds.
Where funds are borrowed specifically to finance a project, the amount capitalised represents the actual borrowing costs incurred. Where the funds used to finance a project form part of general borrowings, the amount capitalised is calculated using a weighted average of rates applicable to relevant general borrowings of the Group during the period.
According to IAS 23Borrowing Costs(“IAS 23”), borrowing costs may include exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs. Foreign exchange differences on borrowings directly attributable to the acquisition, construction or production of a qualifying asset are considered by the Group to be eligible for capitalization in the amount of difference between actual amount of interest costs and potential amount of interest costs calculated using a weighted average of rates applicable to ruble-nominated borrowings of the Group during the period. All other borrowing costs are recognised in the consolidated statement of profit (loss) and other comprehensive income in the period in which they are incurred.
| (m) | Intangible assets |
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses.
Intangible assets with determinable useful lives are amortised using the straight-line method over their estimated period of benefit, ranging from two to twenty five years, and assessed for impairment whenever there is an indication that the intangible asset may be impaired.
| (n) | Financial instruments — initial recognition and subsequent measurement |
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
| (i) | Financial assets |
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient,
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
the Group initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient are measured at the transaction price determined under IFRS 15 (Note 3 (e)).
In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level.
The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified in three categories:
Financial assets at amortised cost;
Financial assets at fair value through OCI;
Financial assets at fair value through profit or loss.
Financial assets at amortised cost
This category of financial assets is the most relevant to the Group. The Group measures financial assets at amortised cost if both of the following conditions are met:
The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and
The contractual terms of the financial asset give rise on specified dates to cash flows that are SPPI on the principal amount outstanding.
Financial assets at amortised cost are subsequently measured using the effective interest rate (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired.
This category generally applies to trade and other receivables excluding trade receivables on provisionally priced contracts.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Financial assets at fair value through OCI
The Group measures financial assets at fair value through OCI if both of the following conditions are met:
The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling; and
The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
For financial assets at fair value through OCI, interest income, foreign exchange revaluation and impairment losses or reversals are recognised in the consolidated statement of profit (loss) and other comprehensive income and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value changes are recognised in OCI. Upon derecognition of financial assets represented by debt instruments at fair value through OCI the cumulative fair value change recognised in OCI is recycled to profit or loss in opposite to equity instruments at fair value through OCI with the cumulative fair value change remained in OCI.
The Group has no instruments measured at fair value through OCI.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model. Notwithstanding the criteria for debt instruments to be classified at amortised cost or at fair value through OCI, as described above, debt instruments may be designated at fair value through profit or loss on initial recognition if doing so eliminates, or significantly reduces, an accounting mismatch.
Trade receivables on provisionally priced contracts are measured at fair value through profit or loss. Trade receivables on provisionally priced contracts are remeasured at each reporting date based on the market price for the relevant period.
Financial assets at fair value through profit or loss are carried in the consolidated statement of financial position at fair value with net changes in fair value recognised in the consolidated statement of profit or loss.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when:
The rights to receive cash flows from the asset have expired; or
The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a “pass-through”
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. |
Allowance for expected credit losses of financial assets
Further disclosures relating to impairment of financial assets are also provided in the following notes:
Financial assets — Note 10.
Trade and other receivables — Note 12.
Allowance for expected credit losses is recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, expected credit losses are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month expected credit losses). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime expected credit losses).
For purposes of measuring probability of default, the Group defines default as a situation when the exposure meets one or more of the following criteria:
the customer is more than 90 days past due on its contractual payments;
international rating agencies have classified the customer in the default rating class;
the customer meets the unlikeliness-to-pay criteria listed below:
the customer is insolvent;
the customer is in breach of financial covenants; and
it is becoming likely that the customer will enter bankruptcy.
For trade receivables and contract assets, the Group applies a simplified approach in calculating expected credit losses. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime expected credit losses at each reporting date.
To estimate the allowance for expected credit losses for trade and other receivables the Group applied 2-dimension model. For individual significant balances with specific characteristics the individual allowance rates were applied based on the historical experience of relationships with those counterparties, individual analysis of their current financial position and forward-looking factors specific to the debtors and the economic environment. For all other balances which are similar by the nature the standard simplified approach was applied with the use of a provision matrix based on the Group’s historical credit loss experience adjusted for forward-looking information. The provision rates are based on days past due for groupings of various homogeneous counterparties. At each reporting date, the historical observed default rates are updated and changes in the forward-looking estimates are analysed.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in Note 10.2. The Group does not hold collateral as security.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Allowance for expected credit losses on cash and cash equivalents is calculated based on the 12-month expected loss basis and reflects the short maturities of the exposures.
| (ii) | Financial liabilities |
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives.
All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Group’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, financial guarantee contracts and derivative financial instruments.
Subsequent measurement
The measurement of financial liabilities depends on their classification, as described below:
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. Gains or losses on liabilities held for trading are recognised in the consolidated statement of profit (loss) and other comprehensive income.
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied.
Loans and borrowings
This is the category most relevant to the Group. After initial recognition, loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the consolidated statement of profit (loss) and other comprehensive income. This category generally applies to loans and borrowings (Note 10).
Put options written on non-controlling interests
The Group initially measures a financial liability at the present value of the redemption amount in the parent’s consolidated financial statements for written puts on non-controlling interests, therefore, when the Group grants non-controlling interests a put option to sell part or all of their interests in a subsidiary during a certain period, on the date of grant, the non-controlling interests are classified as a financial liability. The Group
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
remeasures the financial liability at the end of each reporting period based on the estimated present value of the consideration to be transferred upon the exercise of the put option. The respective finance cost is recognised in the consolidated statement of profit (loss) and other comprehensive income within finance costs.
Call options written on preferred shares
In the consolidated financial statements the Group initially measures a financial liability for call options granted in respect of preferred shares at fair value. Determining the fair value of the call options at the recognition date is subject to judgment. The Group calculated the fair value of call options using mix of the Black-Scholes option pricing model and model of Asian options. The models require input of assumptions, including expected volatility, expected term, risk-free interest rate and dividend yield and other subjective assumptions. The Group remeasures the financial liability at the end of each reporting period at fair value. The respective finance cost or income is recognised in the consolidated statement of profit (loss) and other comprehensive income within finance costs or finance income.
Derecognition
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the consolidated statement of profit (loss) and other comprehensive income.
| (iii) | Interest income |
For all financial instruments measured at amortised cost interest income is recorded using the EIR. The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income is included in finance income in the consolidated statement of profit (loss) and other comprehensive income.
| (o) | Derivative financial instruments |
The Group uses derivative financial instruments, such as cross currency swap and cross currency option. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.
For the years ended December 31, 2019, 2018 and 2017, the Group did not have any derivatives designated as hedging instruments.
| (p) | Inventories |
Inventories are measured at the lower of cost or net realisable value. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and selling expenses.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The cost of inventories is determined under the weighted average cost method, and includes all costs in bringing the inventory to its present location and condition. The elements of costs include direct material, labor and allocable material and manufacturing overhead.
Costs of production in process and finished goods include the purchase costs of raw materials and conversion costs such as direct labor and allocation of fixed and variable production overheads. Raw materials are valued at a purchase cost inclusive of freight and other shipping costs.
Coal and iron ore inventory costs include direct labor, supplies, depreciation of equipment and mining assets, and amortisation of licenses to use mineral reserves, mine operating overheads and other related costs. Operating overheads are charged to expenses in the periods when the production is temporarily paused or abnormally low.
| (q) | Impairment of non-current assets |
Further disclosures relating to impairment of non-current assets are also provided in the following notes:
Intangible assets — Note 16.
Property, plant and equipment — Note 15.
Impairment of goodwill and other non-current assets — Note 17.
The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. The Group’s CGUs represent single entities with one component of business in each case.
In assessing value in use, the Group uses assumptions that include estimates regarding the discount rates, growth rates and expected changes in selling prices, sales volumes and operating costs, as well as capital expenditures and working capital requirements during the forecasted period. The estimated future cash flows expected to be generated by the asset, when the quoted market prices are not available, are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Discount rates used in the impairment test for goodwill and non-current assets are estimated in nominal terms on the weighted average cost of capital basis. The growth rates are based on the Group’s growth forecasts, which are largely in line with industry trends. Changes in selling prices and direct costs are based on historical experience and expectations of future changes in the market. In determining fair value less costs to sell, the Group uses recent market transactions data and best information available to reflect the amount that it could obtain from the disposal of the asset in an arm’s length transaction (e.g., offers obtained from potential buyers).
The Group bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Group’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
For CGUs involved in mining activity future cash flows include estimates of recoverable minerals that will be obtained from proved and probable reserves, mineral prices (considering current and historical prices, price trends and other related factors), production levels, capital and reclamation costs, all based on the life of mine models prepared by the Group’s engineers.
Impairment losses of continuing operations are recognised in the consolidated statement of profit (loss) and other comprehensive income.
For impaired assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognised impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognised. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the consolidated statement of profit (loss) and other comprehensive income unless the asset is carried at a revalued amount, in which case, the reversal is treated as a revaluation increase.
Goodwill is tested for impairment annually as of December 31 and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods.
| (r) | Cash and cash equivalents |
Cash and cash equivalents in the consolidated statement of financial position comprise cash at banks and on hand and short-term deposits with an original maturity of three months or less, which are subject to an insignificant risk of changes in value.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term deposits, as defined above, net of outstanding bank overdrafts as they are considered an integral part of the Group’s cash management.
| (s) | Provisions |
General
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, including legal or tax proceedings’ obligations, and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the consolidated statement of profit (loss) and other comprehensive income, net of any reimbursement.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Rehabilitation provision
Mine rehabilitation costs will be incurred by the Group either while operating, or at the end of the operating life of the Group’s facilities and mine properties. The Group assesses its mine rehabilitation provision at each reporting date. The Group recognises a rehabilitation provision where it has a legal and constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. The nature of these restoration activities includes: dismantling and removing structures; rehabilitating mines and tailings dams; dismantling operating facilities; closing plant and waste sites; and restoring, reclaiming and revegetating affected areas.
The obligation generally arises when the asset is installed or the ground/environment is disturbed at the mining operation’s location. When the liability is initially recognised, the present value of the estimated costs is capitalised by increasing the carrying amount of the related mining assets to the extent that it was incurred as a result of the development/construction of the mine.
Changes in the estimated timing of rehabilitation or changes to the estimated future costs are dealt with prospectively by recognising an adjustment to the rehabilitation provision and a corresponding adjustment to the asset to which it relates, if the initial estimate was originally recognised as part of an asset measured in accordance with IAS 16Property, Plant and Equipment(“IAS 16”).
Any reduction in the rehabilitation provision and, therefore, any deduction from the asset to which it relates, may not exceed the carrying amount of that asset. If it does, any excess over the carrying value is taken immediately to the consolidated statement of profit (loss) and other comprehensive income.
Over time, the discounted liability is increased for the change in present value based on the discount rates that reflect current market assessments and the risks specific to the liability. The periodic unwinding of the discount is recognised in the consolidated statement of profit (loss) and other comprehensive income as part of finance costs.
For closed sites, changes to estimated rehabilitation costs are recognised immediately in the consolidated statement of profit (loss) and other comprehensive income.
Environmental expenditures and liabilities
Environmental expenditures that relate to current or future revenues are expensed or capitalised as appropriate. Expenditures that relate to an existing condition caused by past operations and do not contribute to current or future earnings are expensed. Liabilities for environmental costs are recognised when a clean-up is probable and the associated costs can be reliably estimated. Generally, the timing of recognition of these provisions coincides with the commitment to a formal plan of action or, if earlier, on divestment or on closure of inactive sites. The amount recognised is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the amount recognised is the present value of the estimated future expenditure.
| (t) | Pensions and other post-employment benefits |
Defined benefit pension and other post-retirement plans
The Group has a number of defined benefit pension plans and other long-term benefits that cover the majority of production employees.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Benefits under these plans are primarily based upon years of service and average earnings. The Group accounts for the cost of defined benefit plans and other long-term benefits using the projected unit credit method. Under this method, the cost of providing pensions is charged to the consolidated statement of profit (loss) and other comprehensive income, so as to attribute the total pension cost over the service lives of employees in accordance with the benefit formula of the plan.
The Group’s obligation in respect of defined retirement benefit plans and other long-term benefits is calculated separately for each defined benefit plan and other long-term benefit plan by discounting the amounts of future benefits that employees have already earned through their service in the current and prior periods. The discount rate applied represents the yield at the yearend on highly rated long-term bonds.
For defined benefit pension plans, actuarial gains and losses arising from changes in actuarial assumptions are recognised directly in other comprehensive income. For other long-term benefits, actuarial gains and losses arising from changes in actuarial assumptions are recognised in profit or loss.
For unfunded plans, the Group recognises a pension liability, which is equal to the projected benefit obligation. For funded plans, the Group offsets the fair value of the plan assets with the projected benefit obligations and recognises the net amount of pension liability. The market value of plan assets is measured at each reporting date.
State pension fund
The Group’s Russian companies are legally obligated to make defined contributions to the Russian Pension Fund at the rate of 10% from employee’s annual income over RUB 1.15 million and at the rate of 22% from employee’s annual income not exceeding RUB 1.15 million, managed within the framework of the social security scheme of the Russian Federation (a defined contribution plan financed on a pay-as-you-go basis). The Group’s contributions to the Russian Pension Fund relating to defined contribution plans are charged to income in the year, to which they relate and are recognised within social security costs (Note 24.2).
| (u) | Treasury shares |
Reacquired own equity instruments (treasury shares) are recognised at cost and deducted from equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognised in the additional paid-in capital.
| (v) | Significant accounting judgments, estimates and assumptions |
The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported carrying amounts of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the amounts of revenues and expenses recognised during the reporting period. Estimates and assumptions are continually evaluated and are based on the Group’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Judgments
In the process of applying the Group’s accounting policies, management has made the following judgments, which have the most significant effect on the amount recognised in the consolidated financial statements.
Railway depreciation method
In 2015, the Group commenced to depreciate the railway of the Elga coal deposit using units of production method. In applying the units of production method, depreciation is normally calculated based on produced and delivered tonnes in the period as a percentage of total expected tonnes to be produced and delivered in current and future periods over the Elga coal deposit life cycle. The Group’s analysis has shown that the consumption of the economic benefits of the asset is linked to production and delivery of coal. The Group assesses the total or ultimate railway capacity in tonnes at least at each financial year end and, if expectations differ from previous estimates, the changes will be accounted for as a change in an accounting estimate in accordance with IAS 8Accounting Policies, Changes in Accounting Estimates and Errors(“IAS 8”).
Principal vs agent arrangements
Revenue is recognised when a customer obtains control over the goods or services. Determining the timing of the transfer of control – at a point in time or over time – requires judgement. The Group is engaged into contracts which include transportation and freight services. Under certain agreements, the Group is responsible for providing shipping services after the date at which control over the goods passes to the customer at the loading port or place. Freight and transportation services are required to be accounted for as separate performance obligations with revenue recognised over time as the service is rendered. The Group has concluded that it acts as a principal when it is primarily responsible for fulfilling the promise to provide transportation services and as an agent when it is not primarily responsible for fulfilling the promise to provide transportation andservices. As a result, for operations when the Group acts as an agent.a principal the amounts of transportation costs and freight services, which are included in the transaction price and incurred by the Group in fulfilling its performance obligations shall be recorded as revenue and recognised over time as the obligation is fulfilled. For agent services related to transportation of goods sold, when cost of transportation is included into the goods price, the revenue and selling expenses shouldare recognised on a net basis.
Leases
The likelihood of extension and termination options being exercised, the separation and estimation of non-lease components of payments, the identification and valuation of in-substance fixed payments, the determination of the incremental borrowing rate relevant in calculating lease liabilities are assessed for recognition of right-of-use assets and lease liabilities.
The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be adjustedexercised, or any periods covered by approximately RUB 3,300 million an option to terminate the lease, if it is reasonably certain not to be exercised. The renewable lease contracts that specify an initial period, and renew indefinitely at the end of the initial period unless terminated by either of the parties to the contract are considered enforceable beyond the date on which the contract can be terminated taking into account the broader economics of the contract, and not only contractual termination payments. Lease terms are determined based on the contract terms, production need to lease the specialised asset and terms of rehabilitation obligations.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017 and recognised on a net basis.2019
(d) Presentation and disclosure requirements(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group expectscannot readily determine the interest rate implicit in the lease, therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Group ‘would have to pay’, which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions) or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s functional currency). The Group estimates the IBR using observable inputs (such as market interest rates) when available and is required to make certain entity-specific estimates (such as the subsidiary’s stand-alone credit rating).
Taxation
The Group is subject to taxation to the largest extent in Russia, and secondarily in other jurisdictions. The Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Russian tax authorities take assertive position in its interpretation of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. As such, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of the taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. The fact that a year has been reviewed does not close that year, or any tax declaration applicable to that year, from further review during thethree-year period.
In the event that a taxpayer submits a revised tax declaration for a period of more than three years in which the stated amount of tax is less than the amount previously declared, tax audit of a taxpayer may be performed, but only with the respect to the changes in the tax declaration.
In other tax jurisdictions where the Group conducts operations or holds shares, taxes are generally charged on their worldwide income. In the most jurisdictions agreements to avoid double taxation were signed with other jurisdictions; however, the risk of additional taxation exists, especially in respect of certain domiciles where some of the Group entities are located.
The Russian transfer pricing legislation, which came into force on January 1, 2012, allows the Russian tax authority to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all “controlled” transactions if the transaction price differs from the market level of prices. The list of “controlled” transactions includes transactions performed with related parties and certain types of cross-border transactions. For domestic transactions the transfer pricing rules apply only if taxpayers satisfy certain criteria and the amount of all transaction with related party exceeds RUB 1,000 million since 2019.
In order to support the level of prices applied for the “controlled” transactions the Group should provide evidence that prices of “controlled” transactions are based on market prices and to prepare the reports for submission to the Russian tax authorities. Otherwise, the Russian tax authorities have the right to challenge the prices determined by the Group for such transactions and to charge additional taxes, penalties and fines. In cases where the domestic transaction resulted in an accrual of additional tax liabilities for one party, another party could correspondingly adjust its profit tax liabilities according to the special notification issued by the authorised body in due course. Special transfer pricing rules apply to transactions with securities and derivatives.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group believes that it uses the market prices in “controlled” transactions and does not expect any claims of tax authorities related to the prices used in such transactions. However, due to the uncertainty and limited practice of the Russian legislation in the area of transfer pricing relevant tax claims may be raised and the respective effect is currently impossible to estimate.
In addition, in 2014, the legislation of the Russian Federation has been significantly revised in order to prevent the misuse of low-tax jurisdictions for tax avoidance in the Russian Federation. Changes in the legislation set out the rules for the taxation of income of a foreign organization recognised as a controlled foreign corporation. The foreign organization is recognised as a controlled foreign corporation, if it is not a tax resident of the Russian Federation and the share of the controlling Russian entities or individuals in the organization is more than 25% (in some cases, more than 10%). Starting from the calculation of the profits of controlled foreign corporation for 2017 and beyond, the amount of non-taxable income of 10 million Russian rubles is established. The Russian tax law also provides for certain conditions under which the income of controlled corporations qualifies as tax exempt. The taxable income of the controlling party is increased by the profits of the controlled foreign corporation earned in the financial year ended prior to the reporting year.
Provision for legal claims
The Group is subject to various other lawsuits, claims and proceedings related to matters incidental to the Group’s business, licenses, tax positions. Accruals for probable cash outflows have been made based on an assessment of a combination of litigation and settlement strategies. It is possible that results of operations in any future period could be materially affected by changes in assumptions or by the actual effectiveness of such strategies.
Environmental contingencies
In the course of the Group’s operations, the Group may be subject to environmental claims and legal proceedings. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, improvements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. Management does not believe that any pending environmental claims or proceedings will have a material adverse effect on the Group’s financial position and results of operations.
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below or in the related accounting policy note. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market change or circumstances arising beyond the control of the Group.
In particular, the Group has identified a number of areas where significant estimates and assumptions are required. Further information on each of these areas and how they impact the various accounting policies are described with the associated accounting policy note within the related qualitative and quantitative note as described below.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Deferred tax assets
Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits and the existence of taxable temporary differences (Note 19). Various factors are considered to assess the probability of the future utilization of deferred tax assets for individual subsidiaries and for the consolidated group of taxpayers, including past operating results, operational plans for not longer than five years as this term is considered reliable and accurate for forecast, same assumptions for operational plans as used for determination of the expected future cash flows from the cash generating units, financial plans based on historical data and expectation built on the debt portfolio, terms of the expiration of tax losses carried forward depending on respective tax legislation, and tax planning strategies based on changes in tax regulation for tax losses offsetting for 2018-2020. If actual results differ from these estimates or if these estimates must be adjusted in future periods, the Group’s financial position, results of operations and cash flows may be affected. In the event that the assessment of future utilization of deferred tax assets must be changed, this effect is recognised in the consolidated statement of profit (loss) and other comprehensive income.
The carrying amount of deferred tax assets is reviewed at each reporting date and is adjusted to reflect the likelihood that the estimated taxable profit and taxable temporary differences will be sufficient to recover the asset in whole or in part.
Uncertain tax positions
The Group determines whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments and uses the approach that better predicts the resolution of the uncertainty. The Group applies significant judgement in identifying uncertainties over income tax treatments, and where uncertainty exists, the Group records tax liabilities based on its best estimate of the probable outflow of resources embodying economic benefits, which are required to settle these liabilities.
Impairment of property, plant and equipment and other non-current assets
The Group assesses at each reporting date whether there is any indication that an asset may be impaired. If any such indication exists, the Group makes an estimate of the asset’s recoverable amount. Impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on available data from binding sales transactions, conducted at arm’s length for similar assets or observable market prices less incremental costs for disposing of the asset. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessment of the time value of money and the risks specific to the assets.
Impairment is based on a large number of factors, such as changes in current competitive conditions, expectations of growth in the industry, changes in cost of capital, changes in the future availability of financing, technological obsolescence, and other changes in circumstances that indicate that impairment exists. The determination of the recoverable amount of acash-generating unit involves the use of estimates by management. The key assumptions used in the future cash flow projections include sales and extraction volumes, selling prices (coal, steel products). Methods used to determine the value in use include discounted cash flow-based methods, which require the Group to make an estimate of the expected future cash flows from thecash-generating unit and
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
also to choose a suitable discount rate in order to calculate the present value of those cash flows. These estimates, including the methodologies used, may have a material impact on the value in use and, ultimately, the amount of any impairment (Note 17).
Impairment of goodwill
The Group determines whether goodwill is impaired at least on an annual basis and when circumstances indicate that the carrying value may be impaired. This requires an estimation of the value in use of the cash generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from the cash-generating unit including assumptions related to sales and extraction volumes, selling prices and also to choose a suitable discount rate in order to calculate the present value of those cash flows. More details of the assumptions used in estimating the value in use of the cash-generating units to which goodwill is allocated are provided in Note 17.
Useful lives of items of property, plant and equipment
The Group assesses the remaining useful lives of items of property, plant and equipment at least at each financial year end and, if expectations differ from previous estimates, the changes are accounted for as a change in an accounting estimate in accordance with IAS 8. These estimates may have a material impact on the amount of the carrying values of property, plant and equipment and on depreciation expense for the period.
Mineral reserves
Mineral reserves and the associated mine plans are a material factor in the Group’s computation of amortisation charge proportional to the depletion. Estimation of reserves involves some degree of uncertainty. The uncertainty depends mainly on the amount of reliable geological and engineering data available at the time of the estimate and the interpretation of this data, which also requires use of subjective judgment and development of assumptions. Mine plans are periodically updated which can have a material impact on the amortisation charge proportional to the depletion for the period. More details are provided in Note 3(i).
Provisions
The outcomes of various legal proceedings, disputes and claims to the Group are subject to significant uncertainty. Management evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Unanticipated events or changes in these factors may require the Group to increase or decrease the amount recorded or to be recorded for a matter that has not been previously recorded because it was not considered probable (Note 22).
Pensions and other post-employment benefits
The cost of defined benefit pension plans and other post-employment benefits and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation and other long-term benefit plans are highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. More details are provided in Note 21.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Rehabilitation provisions
The Group reviews rehabilitation provisions at each reporting date and adjusts them to reflect the current best estimate. Rehabilitation provisions are recognised in the period in which they arise and are stated at the best estimate of the present value of estimated future costs. These estimates require extensive judgment about the nature, cost and timing of the work to be completed, and may change with future changes to costs, environmental laws and regulations and remediation practices. The Group applies a suitable discount rate in order to calculate the present value of the estimated future costs, depending on their timing. The terms of rehabilitation works are linked to the termination of extraction phase, use of assets or regulatory requirements and vary significantly for different assets. These estimates, including the methodologies used, may have a material impact on the amount of rehabilitation provision. Changes in the estimated timing of rehabilitation or changes to the estimated future costs are dealt with prospectively by recognising an adjustment to the rehabilitation provision and a corresponding adjustment to the asset to which it relates, if the initial estimate was originally recognised as part of an asset measured in accordance with IAS 16 (Note 15).
Impairment of financial assets
The Group makes allowances for expected credit losses resulting from the expected inability of customers to make required payments. When evaluating the adequacy of an allowance for expected credit losses management bases its estimates on the current overall economic conditions, the ageing of accounts receivable balances, historical write-off experience, debtor creditworthiness and changes in payment terms. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Group’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future (Note 12).
Determining net realisable value of inventories
The Group makes write-downs for obsolete and slow-moving raw materials and spare parts. In addition, finished goods of the Group are carried at net realisable value (Note 11). Estimates of net realisable value of finished goods are based on the most reliable evidence available at the time the estimates are made. These estimates take into consideration fluctuations of price or cost directly relating to events occurring subsequent to the end of the reporting period to the extent that such events confirm conditions existing at the end of the period.
For other judgments, estimates and assumptions and details refer to:
Mineral licenses (Note 3(i));
Property, plant and equipment (Note 3(j));
Deferred tax assets (Note 3(f));
Non-current assets held for sale and discontinued operations (Note 3(h));
Inventories (Note 3(p));
Impairment of non-current assets (Note 3(q));
Pensions and other post-employment benefits (Note 3(t));
Provisions (Note 3(s));
Fair value measurement (Note 3(d)).
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (w) | Reclassifications and rounding |
Certain reclassifications have been made to the prior periods’ consolidated financial statements to conform to the current year presentation. Such reclassifications affect the presentation of certain items in the consolidated statement of financial position, consolidated statement of profit (loss) and other comprehensive income, consolidated statement of cash flows and notes to the consolidated financial statements and have no impact on net income or equity.
All amounts disclosed in these consolidated financial statements and notes have been rounded to the nearest millions of Russian rubles units unless otherwise stated.
| (x) | New and amended standards and interpretations adopted by the Group |
The Group applied for the first time certain standards and amendments, which are effective for annual periods beginning on or after January 1, 2019. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. The nature and the effect of these changes are described below.
The Group applied for the first time IFRS 16 Leases (“IFRS 16”). Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the consolidated financial statements of the Group.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17Leases(“IAS 17”), IFRIC 4Determining whether an Arrangement Contains a Lease(“IFRIC 4”), SIC-15Operating Leases – Incentives and SIC-27Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two recognition exemptions for lessees – leases of‘low-value’ assets (e.g., personal computers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee should recognise a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees are required to separately present the interest expense on the lease liability and the depreciation expense on the right-of-use asset.
Lessees are also required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee should generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
Lessor’s accounting under IFRS 16 is substantially unchanged from IAS 17. Lessors will continue to classify leases using the same classification principle as in IAS 17 and distinguish between two types of leases: operating and finance leases.
The Group applied IFRS 16 from January 1, 2019 retrospectively with a cumulative effect recognised at the date of initial application. The Group has applied the standard to contracts that were previously identified as
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
leases applying IAS 17 and IFRIC 4. The right-of use assets were measured at the amount equal to the lease liability adjusted for the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as of December 31, 2018. The Group did not change the initial carrying amounts of recognised assets and liabilities at the date of initial application for leases previously classified as finance leases, that is the right-of-use assets and lease liabilities equal to the lease assets and liabilities recognised under IAS 17. The Group has used the exemptions proposed by the standard on lease contracts for which the lease terms ends within 12 months as of the date of initial application. The lease payments associated with those leases will be expanded becauserecognised as an expense on a straight-line basis over the lease term. Also, the Group has used the following practical expedient: direct costs are excluded from the measurement of the disclosureright-of-use asset at the date of significant judgements made: when determininginitial application.
In previous years, the transaction pricemajority of thosethe Group’s outstanding short-term and long-term lease contracts thatwere cancellable. IAS 17 requires disclosing operating lease commitments for non-cancellable leases only, while under IFRS 16, the Group is also required to include variable consideration, howin lease liabilities the transaction price has been allocatedpayments relating to the performance obligations, andterm periods covered by an option to terminate the assumptions made to estimate the stand-alone selling prices of each performance obligation. Also, extended disclosures are expected due to significant judgements made when assessing the contractslease if the Group concludelessee is reasonably certain not exercise that it actsoption.
The impact on the consolidated statement of financial position (increase/(decrease)) as an agent instead of a principal. Additionally,January 1, 2019 is presented in the table below:
Millions of | ||||
Assets | ||||
Property, plant and equipment (right-of-use assets) (Note 15) | 2,698 | |||
Deferred tax assets | 28 | |||
Total assets | 2,726 | |||
Liabilities | ||||
Non-current lease liabilities | 3,125 | |||
Current lease liabilities | 134 | |||
Total liabilities | 3,259 | |||
Net impact on equity | (533 | ) | ||
The net impact on equity is attributable to the impairment of right-of-use assets at cash-generating units (CGU) for which impairment of non-current assets was identified and recognised as of December 31, 2018.
On adoption of IFRS 16, the Group has recognised lease liabilities in relation to leases which had previously been classified as operating leases under the principles of IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group’s incremental borrowing rate as of January 1, 2019.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The lease liabilities as of January 1, 2019 can be reconciled to the operating lease commitments as of December 31, 2018 as follows:
| Millions of Russian rubles | ||||
Operating lease commitments of RUB 7,513 million (total rentals payable of RUB 60,911 million excluding leases to explore or use mineral deposits of RUB 53,398 million) | 2,647 | |||
Reclassification from finance lease liabilities | 8,293 | |||
Commitments relating to short-term leases | (73 | ) | ||
Adjustments as a result of a different treatment of extension and termination options, net | 685 | |||
Lease liabilities as of January 1, 2019 | 11,552 | |||
From the date of initial application of IFRS 16 (refer to Note 3 (k)), the right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities and recognised within property, plant and equipment. The majority of right-of-use assets are represented by land and transportation vehicles. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. The Group will disaggregate revenuecontinue to use practical expedients which were applied by the Group at the date of initial application of the new standard, whereas the direct costs will be included in the measurement of the right-of-use asset at the commencement date after initial application. The depreciation on right-of-use assets is recognised within cost of sales, selling and distribution expenses, administrative and other expenses based on the function of the related asset. The interest expense on lease liabilities is recognised within finance costs.
Other amended standards
The following amended standards became effective from contracts with customers into categories1 January 2019, but did not have any material impact on the consolidated financial statements of the Group:
| • | IFRIC 23Uncertainty over Income Tax Treatments (issued on 7 June 2017 and effective for annual periods beginning on or after 1 January 2019). |
| • | Amendments to IAS 19 — Plan Amendment, Curtailment or Settlement (issued on 7 February 2018 and effective for annual periods beginning on or after 1 January 2019). |
| • | Amendments to IAS 28 — Long-term Interests in Associates and Joint Ventures (issued on 12 October 2017 and effective for annual periods beginning on or after 1 January 2019). |
| • | Annual Improvements to IFRSs 2015-2017 cycle amendments to IFRS 3Business Combinations, IFRS 11Joint Arrangements, IAS 12Income Taxesand IAS 23Borrowing Costs (issued on 12 December 2017 and effective for annual periods beginning on or after 1 January 2019). |
Standards issued but not effective
The standards and interpretations that depict howare issued, but not yet effective, up to the nature, amount, timingdate of issuance of the Group’s financial statements are discussed below. The Group intends to adopt these standards and uncertaintyamendments,
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of revenue and cash flowsRussian rubles, unless stated otherwise)
if applicable, when they become effective. The following other new pronouncements are affected by economic factors.not expected to have any material impact on the Group’s consolidated financial statements:
| • | Amendments to IFRS 3 — Definition of a Business (issued on 22 October 2018 and effective for acquisitions from the beginning of annual reporting period that starts on or after 1 January 2020). |
| • | Amendments to IAS 1 and IAS 8 — Definition of Material (issued on 31 October 2018 and effective for annual reporting periods beginning on or after 1 January 2020). |
| • | Amendments to IFRS 9, IAS 39 and IFRS 7 — Interest Rate Benchmark Reform (issued on 26 September 2019 and effective for annual reporting periods beginning on or after 1 January 2020). |
| • | Amendments to IAS 1 — Classification of Liabilities as Current or Non-current (issued on 23 January 2020 and effective for annual reporting periods beginning on or after 1 January 2022). |
| 4. | Going concern |
The Group’s total liabilities exceeded total assets by RUB 233,597 million as of December 31, 2019.
As of December 31, 2019, the Group was not in compliance with the payment schedules under certain credit facilities and a number of financial and non-financial covenants contained in the Group’s loan agreements were breached, as further described in Note 5. These breaches constitute an event of default and, as a result, the lenders may request accelerated repayment of a substantial portion of the Group’s debt.
As a result of these conditions, as of December 31, 2019, the Group’s debt payable on demand amounted to RUB 373,705 million, including RUB 220,046 million of long-term debt classified as short-term debt due to contractual cross-default provisions and RUB 2,097 million of fines and penalties accrued on overdue loans and overdue interest.
As of the date of approval of the consolidated financial statements, the Group did not have sufficient own resources to enable it to comply with such accelerated repayment requests immediately or make payments within 12 months after the date of approval of these consolidated financial statements, in accordance with the repayment schedules agreed, pursuant to earlier loan restructurings. The Group is negotiating with Gazprombank and VTB to restructure and amend the terms and conditions of its existing debt to extend debt maturities beyond 12 months after the date of approval of these consolidated financial statements. In relation thereto, in January-February 2020, the Group requested and received consents from Gazprombank and VTB waiving the accelerated repayment of debt principal until April 1, 2020 and March 31, 2020, respectively, if interest and commissions were paid timely under the respective loan agreements. The Group has made such interest and commission payments on time.
As part of its debt restructuring plans, the Group is considering the sale of certain assets. As such, in January 2020, the Group entered into negotiations relating to the sale of the Elga coal complex to a prospective buyer, which would allow the Group to reduce its debt burden. However, as of the date of approval of the consolidated financial statements, the Group has not agreed a binding sale and it is currently unclear if or when it will be able to conclude a sale of the Elga coal complex. As the sale of the Elga coal complex is currently included as part of the planned debt restructuring, if the sale does not go ahead as planned, the debt restructuring plan will need to be amended.
Management has concluded that the existing uncertainty about the Group’s availability of free cash flow for repayment, its ability to refinance and restructure current liabilities described above and its ability to comply with financial and non-financial covenants contained in its loan agreements, represents a material uncertainty that may cast significant doubt upon the Group’s ability to continue as a going concern. As described above, management is in the
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
process of and intends to achieve a debt restructuring with its lenders to enable the Group to continue in operational existence for at least 12 months after the date of approval of these consolidated financial statements. Management’s strategy also includes enhancement of steel production of the most profitable products, diversification of product range to quickly respond to market changes, and further development of the Group’s mining assets providing additional volumes of high-grade coking coal both to the Russian consumers and to exports markets.
The Group has a history of successful negotiations of debt restructurings. However, if its ongoing discussions with the relevant lenders are unsuccessful or covenants continue to be breached and are not waived by the lenders, the related debt will continue to be payable on demand. In that situation, the Group will consider all available legal options to protect the Group’s operations while negotiating the terms of the restructuring of its debt.
The economic environment and economic conditions in the major segments of the Group’s operations retain uncertainty about the level of demand for the Group’s products, the pricing of major products mined or
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
manufactured by the Group, operationoperating and financial results, the availability of free cash flow for repayment or ability to refinance and restructure current liabilities.
As of December 31, 2017, the Group’s total liabilities exceeded total assets by RUB 244,133 million.
In 2017, the Group finalized the debt restructuring of credit facilities with Gazprombank, Sberbank, VTB and Vnesheconombank (VEB) which represent the majority of the Group’s credit portfolio. However, as of December 31, 2017, restructuring was not finalized with respect to the Group’s credit facilities with the foreign banks and lenders such aspre-export facility creditors andECA-covered loans creditors and therefore the Group was not in compliance with the payment schedules under certain credit facilities and a number of financial andnon-financial covenants contained in the Group’s loan agreements totaling to RUB 411,985 million. As of December 31, 2017, the Group’s debt on demand was RUB 414,760 million, including RUB 284,156 million of long-term debt classified as short-term debt as no debt restructuring was finalized with respect to the Group’s credit portfolio and cross-default provisions, and RUB 21,573 million of fines and penalties accrued on overdue debt and overdue interest. As of the date of approval of the consolidated financial statements, these breaches constitute an event of default and, as a result, the lenders may request accelerated repayment of a substantial portion of the Group’s debt. The Group does not have the resources to enable it to comply with such accelerated repayment requests immediately. However, on December 29, 2017, the Group signed thelock-up agreement withpre-export facility lenders in order to facilitate thepre-export facility restructuring in the future. It will pursue to reach the restructuring agreements with other lenders, includingECA-covered loans creditors.
The management has concluded that the existing uncertainty about the Group’s availability of free cash flow for repayment or ability to refinance and restructure current liabilities described above represents a material uncertainty that casts significant doubt upon the Group’s ability to continue as a going concern. Based on management’s plans and actions undertaken as noted herein, management believes that the Group will achieve restructuring with all of its lenders and secure adequate financing to continue in operational existence for the foreseeable future. The management’s strategy includes enhancement of crude steel production, increase in sales of the major steel products as well as diversifying products range into specialty products, rails and beams targeting higher marginal market niches. Together with the further development of the Group’s mining assets providing additional volumes of high-grade coking coal both to the Russian consumers and to exports markets the Group expects it to result in an increase in profitability. The Group���s detailed monthly operational plans include further optimization of the costs structure andon-going control over the production costs and selling expenses.
The consolidated financial statements have been prepared assuming that the Group will continue as a going concern. Accordingly, the consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, the amounts and classification of liabilities or any other adjustments that might result infrom the Group being unable to continue as a going concern.
| 5. | Capital management |
The equity capital of the Group was formed by injecting shares of its operating subsidiaries into Mechel PAO. This together with obtaining profits allowed the Group to raise debt to finance major investment projects as well as to acquire new companies. Although it has always been the Group’s priority to create and grow the shareholders’ value, during the past several years, the Group has become more focused on managing its debt, which has been the major source for expansion and growth.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Metals and mining industry is known for its capital intensive investment cycle requiring secure long-term financing. In 2012-2015, high price volatility on the coal seaborne market and metal market resulted in the decrease in the Group’s operating profit and impairments ofnon-current assets. Devaluation of the national currency (Russian ruble) affected the amount of foreign exchange losses and increase in cost of financing on local and foreign debt markets. These factsfactors became the major reason for the losses incurred by the Group in the past and resulted in asignificant negative equity. At the meantime the amount of the total Group’s debt denominated in U.S. dollar decreased from $2,963 million (RUB 96,989 million at exchange rate as of December 31, 2013) at the end of 2013 to $1,772 million (RUB 102,040 million at exchange rate as of December 31, 2017) at the end of 2017, which is a result of partial repayment of U.S. dollar-denominated debt and conversion of U.S. dollar-denominated debt intoRUB-denominated loans during the restructuring process.
Given current economic circumstances and the amount of debt, the Group’s primary objective is to focus on resolving the debt issues through a long-term restructuring of the loan portfolio and bringing down both cost of financing and actual interest payments as well as use of all available free cash flow for repayment of debt. The Group’s long-term policy is to maintain a strong capital base to maintain investor, creditor and market confidence and to ensure sustainable future development of the business. The Group’s management constantly monitors profitability and leverage ratios. The Group’s capital management has always beenis based on a number of covenants, of which ‘Net Debt to EBITDA’ and ‘EBITDA to Net Interest Expense’ are the main indicators the management uses for control. The level of dividends is monitored by the Board of Directors of the Group.
The Group was required to comply with the following ratios under the most significant loan agreements with the Russian state-controlled banks as of December 31, 2017:2019:
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Restrictive | Requirement | Actual as of December 31, | ||
| Shall not be less than | |||
| Shall not be less than | |||
| Not exceed | |||
| Not exceed | |||
| Shall not be less than 0.8:1.0 | |||
| Shall not be less than 0.2:1.0 |
The Group was required to comply with the following ratios under the most significant loan agreements with the Russian state-controlled banks as of December 31, 201620181:
Restrictive | Requirement | Actual as of December 31, | ||
| Shall not be less than | |||
| Shall not be less than | |||
| ||||
| ||||
Group’s Cash flow from operating activities to EBITDA | Shall not be less than 0.8:1.0 | 0.90:1.0 | ||
Group’s EBITDA to Revenue | Shall not be less than 0.2:1.0 | 0.24:1.0 |
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
In 2012-2015,previous periods, following a sudden fall of the commodity markets the Group violated most of such covenants and defaulted on major credit facilities of interest and debt payments. Limited free cash flow available for debt service forced the Group to start negotiations with creditors about review of schedule of the debt maturity profile. Current restructuring arrangements with major creditors are aimed at rescheduling repayment of principal, gradual amortisation and decrease in interest payments by partial capitalization.
Cost of debt is also important for the Group’s capital management. Throughout the restructuring process, the Group changed the floating interest rates dependent on the Russian money market (Mosprime rate) to the key rate of the Central Bank of Russia, which is less volatile and better represents the cost of funds for the local banks set by the Central Bank of Russia. The management believes that it will allow the Group to avoid sudden splashes in the cost of debt due to temporary demand/supply fluctuations. In 2016, under the restructuring agreements, the outstanding balance of U.S. dollar-denominated long-term loans was partially converted from U.S. dollar into Russian ruble, which will allow to reduce the cost of foreign currency fluctuations. On the foreign currency indebtedness, the Group’s finance cost is based on the floating LIBOR/EURIBOR, which remains comparatively low. In September 2017, Vnesheconombank and the Group signed a loan agreement which provided an extention of the debt’s maturity until the second quarter of 2022. In December 2017, the Group has obtained consent of more than 75% by value and the majority in number of thepre-export facility participants to implement the restructuring of such facilities.
The main goal for the Group is to achieve long-term restructuring of the loan portfolio with a grace period for repayment of debts and gradual decrease in debt balance, which will permit to restore working capital, improve efficiency of operations and provide ability to sustain full service of debt in accordance with newly agreed repayment schedules as well as use of all available free cash flow for repayment of debt through cash sweep mechanism, which stipulates that all available cash flow above agreed minimum level shall be used for earlier repayment of debts to major creditors.
In June 2016, a 49% stake in the Elga coal complex (OOO Elgaugol, Elga-road OOO and Mecheltrans Vostok OOO) was sold to Gazprombank by exercising an option held by Gazprombank for a total consideration of RUB 34,300 million. All proceeds received from the sale of the shares were used for repayment of the Group’s debtre-assigned from Sberbank to Gazprombank, and to repay overdue payment to Sberbank. Simultaneously with the sale of a 49% stake, a put option in respect of this stake was granted to Gazprombank (see Note 6).debt.
The objectives, policies and processes for managing capital during the yearsyear ended December 31, 20172019 and 20162018 were not changed.
| 6. |
There were no new business combinations in the years ended December 31, 2017, 2016 and 2015.
On December 22, 2011, the Group acquired 100% of the shares of Daveze Ltd, which held 100% of ownership interest in DEMP, a steel plant located in Donetsk, Ukraine, for a consideration of $537,000 thousand (RUB 17,058 million at exchange rate as of December 22, 2011) to be paid in monthly installments during the period from December 2011 until December 2018. The Group continues to pay monthly installments and disclosed the respective payments in the consolidated statement of cash flows within cash outflows from financing activities.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The following table summarizes changes innon-controlling interests for the years ended December 31, 2017, 2016 and 2015:
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In June 2016, 49% share in the Elga coal complex was sold to Gazprombank by exercising an option held by Gazprombank for a total consideration of RUB 34,300 million. The Group sold to Gazprombank upon its request a 49% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 49% stake in Elga-road, the owner of the Ulak-Elga rail line, which had been contributed to the registered capital of this newly established company in March 2016, a 49% stake in Mecheltrans Vostok OOO, the rail line’s transportation operator (collectively, the “target companies”).
Simultaneously with the sale of a 49% stake in the target companies a put option with fixed price and annual interest at the key rate of the Central Bank of Russia plus 2% was granted to Gazprombank to sell the stake (in full or in part) in the target companies to the Group within three years following a five-year grace period or in case of a breach of conditions stipulated by such agreement. This allowed the Group to retain control over 100% of shares and therefore this transaction in fact represents a financial liability. Put options are signed by Yakutugol and Mecheltrans (sellers of the stakes in target companies) and are guaranteed by Mechel Mining and SKCC. If the Group fails to perform under these put options Gazprombank has the right to buy out (call option) the remaining stakes owned by the Group in the target companies and a 100% stake in Mechel Port Vanino. A 1.99% stake in each of the target companies is pledged in favor of Gazprombank as a security for the call option.
For accounting for this financial liability see Note 11.4.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Material partly-owned subsidiaries |
Financial information of subsidiaries that have materialnon-controlling interests is provided below.
Proportion of equity interest held bynon-controlling interests:
Name | At December 31, 2017 | At December 31, 2016 | At December 31, 2019 | At December 31, 2018 | ||||||||||||
SKCC and subsidiaries* | 0.9 | % | 3.4 | % | 0.9 | % | 0.9 | % | ||||||||
Kuzbass Power Sales Company (KPSC) | 27.9 | % | 27.9 | % | 27.9 | % | 27.9 | % | ||||||||
Chelyabinsk Metallurgical Plant (CMP) | 5.8 | % | 5.9 | % | 5.8 | % | 5.8 | % | ||||||||
Southern Urals Nickel Plant (SUNP) | 15.9 | % | 15.9 | % | 15.9 | % | 15.9 | % | ||||||||
Beloretsk Metallurgical Plant (BMP) | 8.6 | % | 8.6 | % | 8.6 | % | 8.6 | % | ||||||||
Korshunov Mining Plant (KMP) | 10.0 | % | 10.0 | % | 10.0 | % | 10.0 | % | ||||||||
Urals Stampings Plant (USP) | 6.2 | % | 6.2 | % | 6.2 | % | 6.2 | % | ||||||||
Izhstal | 10.0 | % | 10.0 | % | 10.0 | % | 10.0 | % | ||||||||
| * | Hereinafter SKCC and subsidiaries are represented by Southern Kuzbass Coal Company (SKCC), Tomusinsky Open Pit Mine (TOPM), Tomusinsky Energoupravlenie. |
| 1 | Detailed information in respect of restrictive covenant calculations is presented in Note 10.1. |
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The summarised financial information for these subsidiaries is provided below. This information is based on amounts before inter-company eliminations. SUNP was recognized as abandoned operations activity according to a decision to close SUNP without sale for the nine months of 2016, and year ended December 31, 2015. Therefore, SUNP’s results for the nine months period ended September 30, 2016, and for the year ended December 31, 2015 are not disclosed in summarised statements of profit and loss and summarized cash flow information below. The SUNP’s results for the fourth quarter of 2016 are disclosed in summarised statements of profit or loss below. Profit allocated to SUNPnon-controlling interest was RUB 19 million and RUB 80 million for the years ended December 31, 2016 and 2015.
Summarised statements of profit (loss) and other comprehensive income (loss) for 2017:2019:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||||||||||||||||||||||||||
Revenue | 31,993 | 22,418 | 118,557 | 102 | 24,206 | 11,492 | 12,725 | 18,696 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue from contracts with customers | 35,059 | 24,624 | 113,020 | 198 | 22,061 | 15,776 | 17,231 | 20,208 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of sales | (18,173 | ) | (10,754 | ) | (102,398 | ) | (24 | ) | (21,464 | ) | (6,136 | ) | (10,089 | ) | (16,199 | ) | (21,667 | ) | (12,479 | ) | (101,258 | ) | (54 | ) | (19,263 | ) | (6,739 | ) | (12,330 | ) | (17,631 | ) | ||||||||||||||||||||||||||||||||
Total selling, distribution and operating expenses, net | (7,844 | ) | (11,182 | ) | (11,894 | ) | (184 | ) | (1,634 | ) | (5,576 | ) | (909 | ) | (3,486 | ) | (7,264 | ) | (11,531 | ) | (11,406 | ) | (218 | ) | (1,749 | ) | (4,439 | ) | (1,157 | ) | 919 | |||||||||||||||||||||||||||||||||
Total other income and (expense), net | 12,769 | 340 | (506 | ) | 531 | 379 | 2,913 | 1,382 | (906 | ) | (233 | ) | 209 | 4,173 | 235 | 41 | 1,831 | 1,633 | (99 | ) | ||||||||||||||||||||||||||||||||||||||||||||
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Profit before tax | 18,745 | 822 | 3,759 | 425 | 1,487 | 2,693 | 3,109 | (1,895 | ) | 5,895 | 823 | 4,529 | 161 | 1,090 | 6,429 | 5,377 | 3,397 | |||||||||||||||||||||||||||||||||||||||||||||||
Income tax (expense) benefit | (718 | ) | (170 | ) | 544 | (85 | ) | (91 | ) | 212 | (144 | ) | 194 | (372 | ) | (174 | ) | (551 | ) | (37 | ) | (28 | ) | (271 | ) | (323 | ) | 97 | ||||||||||||||||||||||||||||||||||||
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Profit (loss) for the year from continuing operations | 18,027 | 652 | 4,303 | 340 | 1,396 | 2,905 | 2,965 | (1,701 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Profit for the period | 5,523 | 649 | 3,978 | 124 | 1,062 | 6,158 | 5,054 | 3,494 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total comprehensive income (loss) | 18,027 | 652 | 4,303 | 340 | 1,396 | 2,905 | 2,965 | (1,701 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive income | 5,523 | 649 | 3,978 | 124 | 1,062 | 6,158 | 5,054 | 3,494 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Attributable tonon-controlling interests | 103 | 182 | 256 | 54 | 114 | 281 | 183 | (170 | ) | 79 | 182 | 231 | 20 | 91 | 613 | 315 | 348 | |||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid tonon-controlling interests | 198 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
Summarised statements of profit (loss) and other comprehensive income for 2018:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Revenue from contracts with customers | 32,251 | 24,084 | 124,372 | 88 | 25,899 | 9,989 | 16,549 | 21,173 | ||||||||||||||||||||||||
Cost of sales | (18,123 | ) | (12,077 | ) | (101,829 | ) | (47 | ) | (24,095 | ) | (6,222 | ) | (13,131 | ) | (19,392 | ) | ||||||||||||||||
Total selling, distribution and operating expenses, net | (9,064 | ) | (11,894 | ) | (11,988 | ) | (170 | ) | (1,867 | ) | (4,250 | ) | (1,099 | ) | (2,498 | ) | ||||||||||||||||
Total other income and (expense), net | (4,514 | ) | 343 | (5,114 | ) | 722 | 1,034 | 2,103 | 2,090 | (1,097 | ) | |||||||||||||||||||||
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Profit (loss) before tax | 550 | 456 | 5,441 | 593 | 971 | 1,620 | 4,409 | (1,814 | ) | |||||||||||||||||||||||
Income tax (expense) benefit | (1,707 | ) | (94 | ) | 1,443 | (115 | ) | (34 | ) | 46 | (109 | ) | 228 | |||||||||||||||||||
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(Loss) profit for the period | (1,157 | ) | 362 | 6,884 | 478 | 937 | 1,666 | 4,300 | (1,586 | ) | ||||||||||||||||||||||
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Total comprehensive (loss) income | (1,157 | ) | 362 | 6,884 | 478 | 937 | 1,666 | 4,300 | (1,586 | ) | ||||||||||||||||||||||
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Attributable to non-controlling interests | 12 | 101 | 345 | 76 | 83 | 166 | 269 | (154 | ) | |||||||||||||||||||||||
Dividends paid to non-controlling interests | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Summarised statements of profit (loss) and other comprehensive income (loss) for 2016:2017:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Revenue | 27,171 | 20,695 | 107,119 | 16 | 22,718 | 8,782 | 12,471 | 14,357 | ||||||||||||||||||||||||
Cost of sales | (18,115 | ) | (10,518 | ) | (84,441 | ) | (8 | ) | (20,311 | ) | (6,064 | ) | (9,908 | ) | (12,456 | ) | ||||||||||||||||
Total selling, distribution and operating expenses, net | (6,284 | ) | (9,865 | ) | (11,261 | ) | 13 | (1,746 | ) | (3,029 | ) | (1,035 | ) | (1,254 | ) | |||||||||||||||||
Total other income and (expense), net | 3,995 | 274 | 1,209 | 530 | (640 | ) | 2,742 | 756 | (476 | ) | ||||||||||||||||||||||
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Profit before tax | 6,767 | 586 | 12,626 | 551 | 21 | 2,431 | 2,284 | 171 | ||||||||||||||||||||||||
Income tax (expense) benefit | (592 | ) | (128 | ) | 297 | (27 | ) | 29 | 25 | (170 | ) | 266 | ||||||||||||||||||||
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Profit for the year from continuing operations | 6,175 | 458 | 12,923 | 524 | 50 | 2,456 | 2,114 | 437 | ||||||||||||||||||||||||
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Total comprehensive income | 6,175 | 458 | 12,923 | 524 | 50 | 2,456 | 2,114 | 437 | ||||||||||||||||||||||||
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Attributable tonon-controlling interests | 241 | 128 | 757 | 83 | 4 | 245 | 132 | 44 | ||||||||||||||||||||||||
Dividends paid tonon-controlling interests | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Revenue from contracts with customers | 31,993 | 22,418 | 118,557 | 102 | 24,206 | 11,492 | 12,725 | 18,696 | ||||||||||||||||||||||||
Cost of sales | (18,173 | ) | (10,754 | ) | (102,398 | ) | (24 | ) | (21,464 | ) | (6,136 | ) | (10,089 | ) | (16,199 | ) | ||||||||||||||||
Total selling, distribution and operating expenses, net | (7,844 | ) | (11,182 | ) | (11,894 | ) | (184 | ) | (1,634 | ) | (5,576 | ) | (909 | ) | (3,486 | ) | ||||||||||||||||
Total other income and (expense), net | 12,769 | 340 | (506 | ) | 531 | 379 | 2,913 | 1,382 | (906 | ) | ||||||||||||||||||||||
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Profit (loss) before tax | 18,745 | 822 | 3,759 | 425 | 1,487 | 2,693 | 3,109 | (1,895 | ) | |||||||||||||||||||||||
Income tax (expense) benefit | (718 | ) | (170 | ) | 544 | (85 | ) | (91 | ) | 212 | (144 | ) | 194 | |||||||||||||||||||
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Profit (loss) for the period | 18,027 | 652 | 4,303 | 340 | 1,396 | 2,905 | 2,965 | (1,701 | ) | |||||||||||||||||||||||
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Total comprehensive income (loss) | 18,027 | 652 | 4,303 | 340 | 1,396 | 2,905 | 2,965 | (1,701 | ) | |||||||||||||||||||||||
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Attributable to non-controlling interests | 103 | 182 | 256 | 54 | 114 | 281 | 183 | (170 | ) | |||||||||||||||||||||||
Dividends paid to non-controlling interests | 198 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Summarised statements of profit (loss) and other comprehensive income (loss) for 2015:financial position as of December 31, 2019:
| SKCC and subsidiaries | KPSC | CMP | BMP | KMP | USP | Izhstal | ||||||||||||||||||||||
Revenue | 31,169 | 20,723 | 96,126 | 23,605 | 7,784 | 12,591 | 9,902 | |||||||||||||||||||||
Cost of sales | (19,842 | ) | (11,268 | ) | (78,995 | ) | (21,518 | ) | (6,400 | ) | (9,663 | ) | (8,589 | ) | ||||||||||||||
Total selling, distribution and operating expenses, net | (6,281 | ) | (8,924 | ) | (6,421 | ) | (1,991 | ) | (3,031 | ) | (3,207 | ) | 5,097 | |||||||||||||||
Total other income and (expense), net | (27,950 | ) | 167 | (9,078 | ) | 1,702 | 2,768 | 993 | (1,552 | ) | ||||||||||||||||||
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(Loss) profit before tax | (22,904 | ) | 698 | 1,632 | 1,798 | 1,121 | 714 | 4,858 | ||||||||||||||||||||
Income tax (expense) benefit | (3,432 | ) | (141 | ) | 665 | 37 | 26 | 298 | (730 | ) | ||||||||||||||||||
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(Loss) profit for the year from continuing operations | (26,336 | ) | 557 | 2,297 | 1,835 | 1,147 | 1,012 | 4,128 | ||||||||||||||||||||
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Total comprehensive (loss) income | (26,336 | ) | 557 | 2,297 | 1,835 | 1,147 | 1,012 | 4,128 | ||||||||||||||||||||
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Attributable tonon-controlling interests | (565 | ) | 155 | 135 | 157 | 114 | 63 | 413 | ||||||||||||||||||||
Dividends paid tonon-controlling interests | 2 | — | — | — | — | — | — | |||||||||||||||||||||
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Current assets | 74,924 | 4,373 | 46,448 | 3,301 | 14,127 | 20,413 | 15,374 | 4,049 | ||||||||||||||||||||||||
Non-current assets | 61,772 | 4,316 | 170,004 | 4,556 | 3,651 | 23,484 | 19,942 | 4,405 | ||||||||||||||||||||||||
Current liabilities | (135,625 | ) | (2,727 | ) | (177,585 | ) | (93 | ) | (5,308 | ) | (3,001 | ) | (5,504 | ) | (10,153 | ) | ||||||||||||||||
Non-current liabilities | (6,626 | ) | (176 | ) | (2,757 | ) | (610 | ) | (261 | ) | (1,098 | ) | (422 | ) | (2,634 | ) | ||||||||||||||||
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Total equity | 5,555 | (5,786 | ) | (36,110 | ) | (7,154 | ) | (12,209 | ) | (39,798 | ) | (29,390 | ) | 4,333 | ||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||
Equity shareholders of Mechel PAO | 5,828 | (4,176 | ) | (34,021 | ) | (6,019 | ) | (11,156 | ) | (35,836 | ) | (27,565 | ) | 3,908 | ||||||||||||||||||
Non-controlling interests | (273 | ) | (1,610 | ) | (2,089 | ) | (1,135 | ) | (1,053 | ) | (3,962 | ) | (1,825 | ) | 425 | |||||||||||||||||
Summarised statements of financial position as of December 31, 2018:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Current assets | 49,771 | 3,735 | 38,571 | 1,507 | 9,594 | 13,863 | 10,217 | 5,171 | ||||||||||||||||||||||||
Non-current assets | 81,868 | 4,187 | 174,639 | 6,201 | 6,442 | 23,221 | 19,139 | 1,803 | ||||||||||||||||||||||||
Current liabilities | (101,714 | ) | (2,757 | ) | (176,114 | ) | (108 | ) | (4,751 | ) | (2,336 | ) | (4,870 | ) | (12,765 | ) | ||||||||||||||||
Non-current liabilities | (40,888 | ) | (31 | ) | (4,921 | ) | (204 | ) | (141 | ) | (917 | ) | (137 | ) | (1,987 | ) | ||||||||||||||||
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Total equity | 10,963 | (5,134 | ) | (32,175 | ) | (7,396 | ) | (11,144 | ) | (33,831 | ) | (24,349 | ) | 7,778 | ||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||
Equity shareholders of Mechel PAO | 11,157 | (3,706 | ) | (30,314 | ) | (6,223 | ) | (10,182 | ) | (30,462 | ) | (22,837 | ) | 7,010 | ||||||||||||||||||
Non-controlling interests | (194 | ) | (1,428 | ) | (1,861 | ) | (1,173 | ) | (962 | ) | (3,369 | ) | (1,512 | ) | 768 | |||||||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Summarised statements of financial position as of December 31, 2017:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Current assets | 43,303 | 3,492 | 44,440 | 7,245 | 10,104 | 11,111 | 11,005 | 4,958 | ||||||||||||||||||||||||
Non-current assets | 86,396 | 4,158 | 86,353 | 0 | 6,810 | 23,006 | 15,958 | 2,880 | ||||||||||||||||||||||||
Current liabilities | (136,469 | ) | (2,804 | ) | (99,119 | ) | (135 | ) | (6,502 | ) | (1,599 | ) | (6,700 | ) | (12,059 | ) | ||||||||||||||||
Non-current liabilities | (4,019 | ) | (76 | ) | (5,252 | ) | (192 | ) | (145 | ) | (390 | ) | (160 | ) | (1,981 | ) | ||||||||||||||||
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Total equity | 10,789 | (4,770 | ) | (26,422 | ) | (6,918 | ) | (10,267 | ) | (32,128 | ) | (20,103 | ) | 6,202 | ||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||
Equity holders of parent | 10,990 | (3,443 | ) | (24,913 | ) | (5,820 | ) | (9,383 | ) | (28,929 | ) | (18,856 | ) | 5,587 | ||||||||||||||||||
Non-controlling interest | (201 | ) | (1,327 | ) | (1,509 | ) | (1,098 | ) | (884 | ) | (3,199 | ) | (1,247 | ) | 615 | |||||||||||||||||
Summarised statements of financial position as of December 31, 2016:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Current assets | 29,513 | 3,666 | 36,533 | 3,150 | 7,367 | 9,905 | 9,768 | 3,490 | ||||||||||||||||||||||||
Non-current assets | 89,689 | 3,586 | 83,378 | 3,841 | 8,010 | 22,165 | 15,197 | 5,526 | ||||||||||||||||||||||||
Current liabilities | (138,268 | ) | (3,025 | ) | (92,371 | ) | (230 | ) | (6,291 | ) | (1,951 | ) | (7,700 | ) | (8,165 | ) | ||||||||||||||||
Non-current liabilities | (3,778 | ) | (104 | ) | (5,562 | ) | (181 | ) | (130 | ) | (799 | ) | (80 | ) | (5,372 | ) | ||||||||||||||||
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Total equity | 22,844 | (4,123 | ) | (21,978 | ) | (6,580 | ) | (8,956 | ) | (29,320 | ) | (17,185 | ) | 4,521 | ||||||||||||||||||
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Attributable to: | ||||||||||||||||||||||||||||||||
Equity holders of parent | 22,492 | (2,974 | ) | (20,690 | ) | (5,534 | ) | (8,190 | ) | (26,401 | ) | (16,113 | ) | 4,069 | ||||||||||||||||||
Non-controlling interest | 352 | (1,149 | ) | (1,288 | ) | (1,046 | ) | (766 | ) | (2,919 | ) | (1,072 | ) | 452 | ||||||||||||||||||
Summarised cash flow information for the year ended December 31, 2017:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Operating | (3,594 | ) | (347 | ) | 3,017 | (845 | ) | (1,532 | ) | (1,636 | ) | (416 | ) | 707 | ||||||||||||||||||
Investing | 15,036 | 421 | 2,069 | 844 | 1,788 | 1,807 | 1,925 | 117 | ||||||||||||||||||||||||
Financing | (11,445 | ) | (45 | ) | (4,826 | ) | 0 | (323 | ) | (172 | ) | (1,590 | ) | (755 | ) | |||||||||||||||||
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Increase (decrease) in cash and cash equivalents, net | (3 | ) | 29 | 260 | (1 | ) | (67 | ) | (1 | ) | (81 | ) | 69 | |||||||||||||||||||
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Summarised cash flow information for the year ended December 31, 2016:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Operating | 14,923 | 707 | 14,900 | 806 | (491 | ) | 86 | 2,119 | 987 | |||||||||||||||||||||||
Investing | 25,989 | (554 | ) | (8,035 | ) | (806 | ) | 398 | 310 | (1,226 | ) | (33 | ) | |||||||||||||||||||
Financing | (41,114 | ) | 200 | (6,418 | ) | — | 151 | (396 | ) | (839 | ) | (949 | ) | |||||||||||||||||||
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(Decrease) increase in cash and cash equivalents, net | (202 | ) | 353 | 447 | — | 58 | — | 54 | 5 | |||||||||||||||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Summarised cash flow information for the year ended December 31, 2015:2019:
| SKCC and subsidiaries | KPSC | CMP | BMP | KMP | USP | Izhstal | SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | ||||||||||||||||||||||||||||||||||||||||||||||
Operating | 11,513 | 924 | 2,586 | 1,622 | (2,123 | ) | 1,926 | 803 | 12,043 | 243 | 10,898 | (146 | ) | (2,482 | ) | 2,867 | 1,375 | 2,839 | ||||||||||||||||||||||||||||||||||||||||||
Investing | (7,894 | ) | (584 | ) | (12,368 | ) | 622 | 2,352 | (3,782 | ) | (34 | ) | (950 | ) | (58 | ) | (3,522 | ) | 163 | 2,685 | (2,627 | ) | (912 | ) | (72 | ) | ||||||||||||||||||||||||||||||||||
Financing | (3,464 | ) | (21 | ) | 9,482 | (2,090 | ) | (274 | ) | 1,557 | (756 | ) | (10,945 | ) | (245 | ) | (7,108 | ) | (17 | ) | 505 | (240 | ) | (199 | ) | (2,741 | ) | |||||||||||||||||||||||||||||||||
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Increase (decrease) in cash and cash equivalents, net | 155 | 319 | (300 | ) | 154 | (45 | ) | (299 | ) | 13 | 148 | (60 | ) | 268 | — | 708 | — | 264 | 26 | |||||||||||||||||||||||||||||||||||||||||
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Summarised cash flow information for the year ended December 31, 2018:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Operating | 13,152 | 193 | 13,015 | (264 | ) | (1,891 | ) | 1,325 | 3,950 | 1,647 | ||||||||||||||||||||||
Investing | 547 | (97 | ) | (76,283 | ) | 264 | 1,870 | (1,003 | ) | (1,163 | ) | (89 | ) | |||||||||||||||||||
Financing | (13,651 | ) | (99 | ) | 63,200 | — | (169 | ) | (322 | ) | (2,829 | ) | (1,604 | ) | ||||||||||||||||||
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Increase (decrease) in cash and cash equivalents, net | 48 | (3 | ) | (68 | ) | — | (190 | ) | — | (42 | ) | (46 | ) | |||||||||||||||||||
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Summarised cash flow information for the year ended December 31, 2017:
| SKCC and subsidiaries | KPSC | CMP | SUNP | BMP | KMP | USP | Izhstal | |||||||||||||||||||||||||
Operating | 3,434 | 112 | 8,036 | (211 | ) | (1,221 | ) | 500 | 560 | 751 | ||||||||||||||||||||||
Investing | 8,008 | (38 | ) | (2,950 | ) | 210 | 1,477 | (329 | ) | 949 | 73 | |||||||||||||||||||||
Financing | (11,445 | ) | (45 | ) | (4,826 | ) | — | (323 | ) | (172 | ) | (1,590 | ) | (755 | ) | |||||||||||||||||
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(Decrease) increase in cash and cash equivalents, net | (3 | ) | 29 | 260 | (1 | ) | (67 | ) | (1 | ) | (81 | ) | 69 | |||||||||||||||||||
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Investments in associates |
Investments in associates comprised of:
| Percent of shares held at | Investment carrying value at | Percent of shares held at | Investment carrying value at | |||||||||||||||||||||||||||||
Investee | December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||
Mechel Somani Carbon (Mining segment) | 51 | % | 51 | % | 0 | — | ||||||||||||||||||||||||||
TPTU (Mining segment) | 40 | % | 40 | % | 183 | 175 | 40 | % | 40 | % | 208 | 189 | ||||||||||||||||||||
TRMZ (Mining segment) | 25 | % | 25 | % | 100 | 90 | 25 | % | 25 | % | 113 | 104 | ||||||||||||||||||||
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Total investments in associates | 283 | 265 | 321 | 293 | ||||||||||||||||||||||||||||
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Mechel Somani Carbon Private Limited shares are owned by Mechel Carbon AG. The core business is distribution of metallurgical coals in
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the Indian market. Despite the ownership of 51% of Mechel Somani Carbon shares the Group cannot exercise control over the company. As ofyear ended December 31, 2017 and 2016, the Group recognized a provision2019
(All amounts are in millions of RUB 42 million for this investment.Russian rubles, unless stated otherwise)
TPTU (Tomusinskiy Transportation Management Center) shares are owned by SKCC. The core business is provision of transportation services both to the Group’s subsidiaries and third parties.
services. TRMZ (Tomusinskiy Auto Repair Shop) shares are owned by SKCC. TRMZ provides repair services to the Group’s subsidiaries.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
services.
The following table shows movements in the investments in associates:
| Mechel Somani Carbon Private Limited (Mining segment) | TPTU (Mining segment) | TRMZ (Mining segment) | Total | |||||||||||||
December 31, 2014 | 39 | 155 | 80 | 274 | ||||||||||||
Share of (loss) profit | (5 | ) | 2 | 3 | — | |||||||||||
Exchange differences | 10 | — | — | 10 | ||||||||||||
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December 31, 2015 | 44 | 157 | 83 | 284 | ||||||||||||
Share of profit | — | 18 | 7 | 25 | ||||||||||||
Provision for impairment of investments | (42 | ) | — | — | (42 | ) | ||||||||||
Exchange differences | (2 | ) | — | — | (2 | ) | ||||||||||
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December 31, 2016 | — | 175 | 90 | 265 | ||||||||||||
Share of profit | 0 | 9 | 9 | 18 | ||||||||||||
December 31, 2017 | 0 | 184 | 99 | 283 | ||||||||||||
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| TPTU (Mining segment) | TRMZ (Mining segment) | Total | ||||||||||
December 31, 2016 | 175 | 90 | 265 | |||||||||
Share of profit | 9 | 9 | 18 | |||||||||
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December 31, 2017 | 184 | 99 | 283 | |||||||||
Share of profit | 5 | 5 | 10 | |||||||||
December 31, 2018 | 189 | 104 | 293 | |||||||||
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Share of profit | 19 | 9 | 28 | |||||||||
December 31, 2019 | 208 | 113 | 321 | |||||||||
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Related party disclosures |
Note 1 provides information about the Group’s structure, including details of the subsidiaries and the holding company. The following table provides the total amount of transactions that have been entered into with the related parties in 2017, 20162019, 2018 and 2015.2017.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Purchases | Sales | Other loss (income) | Purchases | Sales | Other loss (income) | Purchases | Sales | Other loss (income) | Purchases | Sales | Other loss (income) | Purchases | Sales | Other loss (income) | Purchases | Sales | Other loss (income) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Associates | 230 | 134 | (6 | ) | 200 | 117 | (11 | ) | 199 | 80 | 28 | 110 | 98 | — | 121 | 103 | (33 | ) | 230 | 134 | (6 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
Controlling shareholders and entities under control of the Group’s Controlling shareholders | 267 | 50 | (33 | ) | 278 | 45 | 41 | 261 | 37 | (23 | ) | 904 | 184 | 138 | 280 | 52 | (9 | ) | 267 | 50 | (33 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
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Total | 497 | 184 | (39 | ) | 478 | 162 | 30 | 460 | 117 | 5 | 1,014 | 282 | 138 | 401 | 155 | (42 | ) | 497 | 184 | (39 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
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As of December 31, 20172019 and 2016,2018, the Group had the following balances in settlement with related parties:
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||
| Receivables from | Payables to | Total outstanding, net | Receivables from | Payables to | Total outstanding, net | Financial assets from | Financial liabilities to | Total outstanding, net | Financial assets from | Financial liabilities to | Total outstanding, net | |||||||||||||||||||||||||||||||||||||
Associates | 16 | (23 | ) | (7 | ) | 33 | (55 | ) | (22 | ) | 7 | (6 | ) | 1 | 7 | (13 | ) | (6 | ) | |||||||||||||||||||||||||||||
Controlling shareholders and entities under control of the Group’s Controlling shareholders | 47 | (35 | ) | 12 | 70 | (37 | ) | 33 | 100 | (963 | ) | (863 | ) | 50 | (500 | ) | (450 | ) | ||||||||||||||||||||||||||||||
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Total | 63 | (58 | ) | 5 | 103 | (92 | ) | 11 | 107 | (969 | ) | (862 | ) | 57 | (513 | ) | (456 | ) | ||||||||||||||||||||||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (a) |
The Group’s associates provide to the Group’s subsidiaries transportation and auto repair services. During the years ended December 31, 2017, 2016 and 2015, the Group purchased from its associates transportation services in the amount of RUB 98 million, RUB 114 million and RUB 105 million, respectively, and repair services in the amount of RUB 132 million, RUB 86 million and RUB 94 million, respectively.
| Controlling shareholders and entities under control of the Group’s Controlling shareholders |
As of December 31, 20172019 and 2016,2018, the amounts of accounts receivablenon-current financial assets fully covered by the allowance for expected credit losses included amounts receivable of RUB 24,391 million and RUB 24,53924,391 million, respectively, described below. In December 2013, the Group, related party (an entity wholly owned by the Controlling Shareholder) and the former Estar metallurgical plants (hereinafter referred to as “metallurgical plants”) signed an assignment agreement. Under that agreement, the Group assigned to its related party the right to collect amounts due from the metallurgical plants, and the related party is to repay this amount to the Group through November 2017. In November 2017, the Group extended the terms of repayment through 2022. The amount of receivables and allowance for expected credit losses have been reclassified toNon-current financial assets (Note 13)12).
The outstanding cash balance in Coalmetbank, an entity under control of the Group’s controlling shareholders, was RUB 1,2171,509 million and RUB 200703 million as of December 31, 20172019 and December 31, 2016,2018, respectively.
In 2019, the Group purchased energy and electricity from its related party in the amount of RUB 692 million.
Compensation to key management personnel |
The total compensation to key management personnel was included in general and administrative expenses in the consolidated statement of profit (loss) and other comprehensive income (loss) and consisted of the short-term employee benefits in the amount of RUB 613592 million, RUB 543561 million and RUB 481613 million in the yearsyear ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. There are no share-based payments to key management personnel. The Group’s directors and executive officers are also provided with voluntary medical insurance and the use of wireless services.
Fair value measurement |
Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial instrumentsliabilities that are carried in the consolidated financial statements:
| December 31, 2017 | December 31, 2016 | |||||||||||||||||||
| Level | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||||||
Financial liabilities | ||||||||||||||||||||
Interest-bearing loans and borrowings: | ||||||||||||||||||||
— Floating rate loans | 3 | 402,024 | 355,794 | 407,015 | 357,782 | |||||||||||||||
— Bonds | 1 | 14,759 | 13,984 | 14,717 | 12,740 | |||||||||||||||
— Fixed rate loans | 3 | 23,110 | 20,505 | 24,077 | 23,105 | |||||||||||||||
Othernon-current financial liabilities (Note 11.4) | 3 | 40,916 | 33,854 | 36,198 | 25,772 | |||||||||||||||
Other current financial liabilities (Note 11.5) | 2 | 734 | 734 | — | — | |||||||||||||||
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Total | 481,543 | 424,871 | 482,007 | 419,399 | ||||||||||||||||
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| December 31, 2019 | December 31, 2018 | |||||||||||||||||||
| Level | Carrying amount | Fair value | Carrying amount | Fair value | ||||||||||||||||
Financial liabilities measured at amortised cost | ||||||||||||||||||||
Floating rate loans and borrowings | 2 | 370,312 | 357,276 | 384,608 | 356,444 | |||||||||||||||
Bonds | 1 | 6,483 | 6,534 | 11,195 | 10,876 | |||||||||||||||
Fixed rate loans and borrowings | 2 | 11,727 | 11,169 | 23,029 | 21,852 | |||||||||||||||
Other non-current financial liabilities (Note 10.4) | 2 | 48,303 | 46,200 | 44,510 | 40,528 | |||||||||||||||
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Total | 436,825 | 421,179 | 463,342 | 429,700 | ||||||||||||||||
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Management assessed thatThe fair value of loans and borrowings was calculated based on the fair valuespresent value of future principal and interest cash and short-term deposits, trade receivables, trade payables, bank overdrafts and other current liabilities approximate their carrying amounts largely due toflows, discounted at the short-term maturities of these instruments.Group’s interest rates adjusted for risk premium at the reporting dates (Level 2).
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Management assessed that the fair values of cash and cash equivalents, trade and other receivables (other than arising from provisionally priced contracts), trade and other payables and bank overdrafts approximate their carrying amounts largely due to the short-term maturities of these instruments.
As of December 31, 2019 and 2018, trade receivables of RUB 459 million and RUB 1,938 million arising from provisionally priced contracts were measured at fair value through profit or loss upon recognition (Level 2). The adjustments to the final price on provisionally priced contracts measured at fair value resulted in a net loss of RUB 815 million, net gain of RUB 29 million and net loss of RUB 1,520 million and are recorded within revenue for the year ended December 31, 2019, 2018 and 2017, respectively.
The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Financial assets and financial liabilities |
Financial liabilities: |
The Group has the following principal and interest amounts outstanding for interest-bearing loans and bonds:
Short-term borrowings and current portion of long-term debt | December 31, 2017 | December 31, 2016 | ||||||||||||||
| Interest rate, % | Amount of outstanding debt | Interest rate, % | Amount of outstanding debt | |||||||||||||
In Russian rubles | ||||||||||||||||
Banks and financial institutions | 9.3-12 | 2,410 | 9.8-14.5 | 3,458 | ||||||||||||
Corporate lenders | 6.7 | 65 | 6.7 | 64 | ||||||||||||
Weighted average interest rate for the period | 11.9 | 0 | 13.9 | |||||||||||||
In U.S. dollars | ||||||||||||||||
Banks and financial institutions | 0 | 0 | 8.0 | 154 | ||||||||||||
Weighted average interest rate for the period | 0 | 0 | 8.0 | |||||||||||||
In euro | ||||||||||||||||
Banks and financial institutions | 0 | 0 | 2.8 | 114 | ||||||||||||
Corporate lenders | 0 | 2 | — | — | ||||||||||||
Weighted average interest rate for the period | 0 | 0 | 2.8 | |||||||||||||
Current portion of long-term debt | 0 | 378,063 | — | 391,781 | ||||||||||||
Interest payable | 0 | 20,420 | — | 16,916 | ||||||||||||
Fines and penalties on overdue amounts | 0 | 21,573 | — | 21,678 | ||||||||||||
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Total short-term borrowings and current portion oflong-term debt | 422,533 | 434,165 | ||||||||||||||
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| |||||||||||||
Long-term debt | December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||||||||||
| Interest rate, % | Amount of outstanding debt | Interest rate, % | Amount of outstanding debt | |||||||||||||||||||||||||||||
Short-term borrowings and current portion of long-term debt | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||||||||||
| Interest rate, % | Amount of outstanding debt | Interest rate, % | Amount of outstanding debt | |||||||||||||||||||||||||||||
In Russian rubles | ||||||||||||||||||||||||||||||||
Banks and financial institutions | 5.0-15.0 | 253,421 | 5.0-15.0 | 258,855 | 7.8 | 1,347 | 9.3-9.6 | 3,634 | ||||||||||||||||||||||||
Bonds issue | 8.0-14.0 | 14,459 | 8.0-15.0 | 14,365 | ||||||||||||||||||||||||||||
Corporate lenders | 6.7 | 5 | 6.7 | 5 | — | — | 6.7 | 10 | ||||||||||||||||||||||||
Weighted average interest rate for the period | 9.5 | 0 | 12.5 | |||||||||||||||||||||||||||||
In U.S. dollars | ||||||||||||||||||||||||||||||||
Banks and financial institutions | 2.2-8.9 | 102,040 | 2.2-8.2 | 107,346 | ||||||||||||||||||||||||||||
Weighted average interest rate for the period | 8.3 | 0 | 8.2 | 7.8 | 9.4 | |||||||||||||||||||||||||||
In euro | ||||||||||||||||||||||||||||||||
Banks and financial institutions | 0.8-7.0 | 25,498 | 0.8-7.3 | 22,854 | 1.7-1.9 | 524 | 1.3-2.8 | 580 | ||||||||||||||||||||||||
Corporate lenders | — | — | 3.0 | 22 | ||||||||||||||||||||||||||||
Weighted average interest rate for the period | 2.7 | 0 | 4.5 | 1.9 | 1.5 | |||||||||||||||||||||||||||
Current part of long-term loans and borrowings | (378,063 | ) | (391,781 | ) | ||||||||||||||||||||||||||||
Current portion of long-term debt | — | 368,335 | — | 398,171 | ||||||||||||||||||||||||||||
Interest payable | — | 9,014 | — | 7,749 | ||||||||||||||||||||||||||||
Fines and penalties on overdue amounts | — | 2,097 | — | 2,128 | ||||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||||
Total long-term debt | 17,360 | 11,644 | ||||||||||||||||||||||||||||||
Total short-term borrowings and current portion oflong-term debt | 381,317 | 412,294 | ||||||||||||||||||||||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Long-term debt | December 31, 2019 | December 31, 2018 | ||||||||||||||
| Interest rate, % | Amount of outstanding debt | Interest rate, % | Amount of outstanding debt | |||||||||||||
In Russian rubles | ||||||||||||||||
Banks and financial institutions | 1.0-9.8 | 239,659 | 5.0-10.0 | 242,499 | ||||||||||||
Bonds issue | 8.0-11.9 | 6,370 | 8.0-12.3 | 10,979 | ||||||||||||
Corporate lenders | 9.3 | 43 | 6.7 | 73 | ||||||||||||
Weighted average interest rate for the period | 7.9 | 9.3 | ||||||||||||||
In U.S. dollars | ||||||||||||||||
Banks and financial institutions | 3.2-9.0 | 44,725 | 3.9-9.9 | 54,719 | ||||||||||||
Corporate lenders | — | — | 3.0 | 138 | ||||||||||||
Weighted average interest rate for the period | 8.4 | 8.6 | ||||||||||||||
In euro | ||||||||||||||||
Banks and financial institutions | 0.8-7.0 | 84,743 | 0.8-7.0 | 96,301 | ||||||||||||
Weighted average interest rate for the period | 4.8 | 4.8 | ||||||||||||||
Current part of long-term loans and borrowings | (368,335 | ) | (398,171 | ) | ||||||||||||
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|
| |||||||||||||
Total long-term debt | 7,205 | 6,538 | ||||||||||||||
|
|
|
| |||||||||||||
Aggregate scheduled maturities of the debt outstanding as of December 31, 20172019 were as follows:
Payable by | ||||||||
On demand (current portion) | 414,760 | |||||||
2018 (current portion) | 7,773 | |||||||
2019 | 4,967 | |||||||
2020 | 6,100 | |||||||
On demand | 373,705 | |||||||
2020 (current portion) | 7,612 | |||||||
2021 | 4,704 | 4,829 | ||||||
2022 | 1,589 | 2,292 | ||||||
2023 | 14 | |||||||
2024 | 49 | |||||||
Thereafter | 0 | 21 | ||||||
|
| |||||||
Total | 439,893 | 388,522 | ||||||
|
| |||||||
The unused portion under all credit facilities as of December 31, 20172019 and 20162018 was RUB 475514 million and RUB 373573 million, respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The outstanding balances of principal amount of short-term and long-term debt by denominated currencies and major banks as of December 31, 20172019 and 20162018 were as follows:
Short-term and long-term debt | December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | ||||||||||||
Russian ruble-denominated | ||||||||||||||||
Gazprombank | 148,238 | 153,614 | 139,971 | 142,635 | ||||||||||||
VTB | 72,570 | 71,711 | 99,411 | 73,416 | ||||||||||||
Sberbank | 26,459 | 31,106 | — | 25,723 | ||||||||||||
Bonds | 14,459 | 14,365 | 6,370 | 10,979 | ||||||||||||
Uralsib | 2,214 | 3,116 | ||||||||||||||
Eurasian Development Bank | 517 | 1,227 | ||||||||||||||
Raiffeisen Bank | 139 | 490 | ||||||||||||||
Eximbank of Russia | — | 3,305 | ||||||||||||||
Other | 5,764 | 1,119 | 1,667 | 1,137 | ||||||||||||
|
|
|
| |||||||||||||
Total | 270,360 | 276,748 | 247,419 | 257,195 | ||||||||||||
|
|
|
| |||||||||||||
U.S. dollar-denominated | ||||||||||||||||
VTB | 27,256 | 7,573 | ||||||||||||||
BNP | 9,587 | 10,759 | ||||||||||||||
VEB | 7,000 | 8,794 | ||||||||||||||
Sberbank | — | 23,147 | ||||||||||||||
MCB | 676 | 4,037 | ||||||||||||||
Pre-export facility | 57,829 | 60,898 | — | 7 | ||||||||||||
Sberbank | 14,626 | 21,811 | ||||||||||||||
VEB | 10,090 | 10,147 | ||||||||||||||
BNP | 8,894 | 9,251 | ||||||||||||||
VTB | 6,172 | — | ||||||||||||||
MCB | 4,096 | 5,041 | ||||||||||||||
Other | 333 | 351 | 206 | 540 | ||||||||||||
|
|
|
| |||||||||||||
Total | 102,040 | 107,499 | 44,725 | 54,857 | ||||||||||||
|
|
|
| |||||||||||||
Euro-denominated | ||||||||||||||||
VTB | 66,145 | 74,794 | ||||||||||||||
BNP | 13,504 | 9,460 | 13,793 | 15,752 | ||||||||||||
VTB | 3,334 | 3,214 | ||||||||||||||
UniCredit Bank (former BayerischeHypo-und-Vereinsbank) | 2,970 | 2,723 | ||||||||||||||
ING Bank | 2,182 | 1,997 | 2,221 | 2,541 | ||||||||||||
BNL | 0 | 2,736 | ||||||||||||||
Raiffeisen Bank | 411 | 381 | ||||||||||||||
NatWest Markets | 1,352 | 1,549 | ||||||||||||||
Commerzbank | — | 1,317 | ||||||||||||||
Deutsche Bank AG. | 1,150 | — | ||||||||||||||
Other | 3,099 | 2,457 | 606 | 950 | ||||||||||||
|
|
|
| |||||||||||||
Total | 25,500 | 22,968 | 85,267 | 96,903 | ||||||||||||
|
|
|
| |||||||||||||
Total short-term and long-term debt | 397,900 | 407,215 | 377,411 | 408,955 | ||||||||||||
|
|
|
| |||||||||||||
| (a) | Pre-export facility agreement |
In 2018, the Group refinanced an existing pre-export credit facility by receiving a new euro-denominated loan from VTB in the amount of RUB 66,368 million (EUR 897 million at the dates of transactions). The loan matures in April 2022. The outstanding balances of the pre-export credit facility as of December 31, 2019 and 2018 were nil and RUB 7 million ($100 thousand at exchange rate as of December 31, 2018), respectively.
The finance income in the amount of RUB 12,854 million was recorded in the consolidated statements of profit (loss) and other comprehensive income for the year ended December 31, 2018 as a result of refinancing of pre-export credit facility.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
VTB facilities |
AsIn November 2019, all the ruble-denominated credit facilities of December 31, 2017,pre-export facilityCMP, SKCC and BFP were transferred from Sberbank to VTB according to the assignment agreement (represented bybetween Sberbank and VTB, the syndicate of lenders — UniCredit Bank, Caterpillar Financial, ING Bank N.V., VTB Capital plsterms and other) bears interest at 1M LIBOR plus 5.5% p.a. (or 7.5% p.a. if payments are overdue). The outstanding balances as of December 31, 2017 and 2016 were RUB 57,829 million ($1,003,964 thousand at exchange rate as of December 31, 2017) and RUB 60,898 million ($1,003,964 thousand at exchange rate as of December 31, 2016), respectively.
As of December 31, 2017,conditions remained the Group’s overdue principal amount and overdue interest onpre-export facility agreement amounted to RUB 57,829 million and RUB 11,198 million, respectively, as of December 31, 2016 — RUB 60,898 million and RUB 7,123 million, respectively.
As of December 31, 2016, the Group wassame in the process of negotiation with the syndicate of lenders in order to reach the restructuring agreements for thepre-export credit facility. In February 2017, a number of lenders underpre-export facility agreements filed 14 requests for arbitration with the LCIA. Subsequently, the majority of banks from the syndicate renounced their claims and signed thelock-up agreement with the Group in December 2017 in order to facilitate thepre-export facility restructuring in the future. Preliminary restructuring conditions include extending the loan’s final maturity to the first quarter of 2022 and bringing the interest rate down to the level of LIBOR plus 3.5% annual interest (with the possibility of reducing it further down to LIBOR plus 3% annual interest).assigned agreement.
The outstanding balances of the ruble-denominated facilities as of December 31, 20172019 and 20162018 were RUB 72,57099,411 million and RUB 71,71173,416 million, respectively, bearing interest at 9.3%7.8-8.8% p.a.
In December 2016, the Group signed amendments to the restructuring agreements providing an extension ofand, in April 2017, VTB confirmed the repayment grace period until April 2020 and of the final maturity until April 2022 forrestructuring terms under the credit facilities of Mechel PAO, CMP, SKCC and Yakutugol in the total amount of RUB 71,711 million. The interest rate under the restructured agreements is set at the level of the key rate of the Central Bank of Russia plus 1.5% starting April 2016 (subject to increase to 2.35% through January 6, 2018, and 2.99% afterwards if certain conditions are not met). In April 2017, VTB confirmed the restructuring terms under the relevant credit facilities including an extension of the repayment grace period until 2020 and the final maturity until 2022 and annual interest rate at the level of the key rate of the Central Bank of Russiathe Russian Federation plus 1.5% for the ruble-denominated credit facilities. In accordance with the restructuring terms, the repayment of a RUB 30,000 million credit facility issued to Mechel PAO is made in equal installments within 36 months starting February 22, 2017 from the proceeds received from VTB under the credit facility issued to CMP2. Fines and penalties accrued prior to the restructuring date (December 23, 2016) were waived according to the restructured agreements (apart from the most significant amount of penalties accrued on credit facility of Mechel PAO — see details below).
In December 2016,October 2018, the Group fulfilled the terms of restructuring agreement signed the prolongation agreement providing with the final maturity until April 2022 for the euro-denominated credit facility of MCAGin 2015. Consequently, finance income in the amount of RUB 2,81212,101 million, (44,068 thousand euroincluding fines and penalties in the amount of RUB 9,878 million, was recognised in the consolidated statements of profit (loss) and other comprehensive income for the year ended December 31, 2018.
In 2018, the Group received an euro-denominated loan from VTB bearing interest at 1M EURIBOR plus 5.5% p.a. in the amount of EUR 897 million (RUB 66,368 million at the exchange ratedate of transactions) in order to refinance the existing pre-export credit facilities in the amount of EUR 864 million (RUB 63,844 million at the date of transactions) and for other purposes in the amount of EUR 33 million (RUB 2,524 million at the date of transactions).
The outstanding balances of the euro-denominated credit facilities as of December 31, 2016). 2019 and 2018 were RUB 66,145 million and RUB 74,794 million, respectively, bearing interest at 5.3-7.0% p.a.
In November 2019, all the U.S. dollar-denominated credit facilities of SKCC were transferred from Sberbank to VTB according to the assignment agreement between Sberbank and VTB.
The outstanding balancesbalance of the U.S. dollar-denominated credit facilities as of December 31, 20172019 and 2016 were2018 was RUB 3,33427,256 million and RUB 3,2147,573 million, respectively.respectively, bearing interest at 9.0% p.a.
| (c) | Gazprombank facilities |
The outstanding balances of the ruble-denominated facilities as December 31, 2019 and 2018 were RUB 139,971 million and RUB 142,635 million, respectively, bearing interest at 7.8% p.a.
| 2 | Cash flows arising from settlement of VTB credit facilities were disclosed on a gross basis (as cash inflows and cash outflows within financing activities in the amount of RUB 5,000 million for the |
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
As part of the restructuring requirement, in January 2017, the Group signed a call option agreement with VTB providing VTB with an option to acquire preferred shares of the Group (Note 11.5).
In April 2017, the U.S. dollar-denominated credit facilities of MTAG were transferred from Sberbank to VTB according to the assignment agreement between Sberbank and VTB. The outstanding balance of these credit facilities as of December 31, 2017 was RUB 6,172 million bearing interest at 8.4% p.a.
There was no overdue principal amount and overdue interest on VTB credit facilities as of December 31, 2017 and 2016. The fines and penalties on overdue amounts of RUB 10,1963 million and RUB 10,597 million were recorded in interest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2017 and 2016, respectively. The amount of nil, RUB 184 million and RUB 9,704 million was recorded as finance costs in the consolidated statement of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2017, 2016 and 2015, respectively.
The outstanding balances of the ruble-denominated facilities as December 31, 2017 and 2016 were RUB 148,238 million and RUB 153,614 million, respectively, bearing interest at 9.3% p.a.
In 2015, the Group signed restructuring agreements (became effective in 2016) providing with an extension of the repayment grace period untiland in April 2017, andGazprombank confirmed the restructuring terms of the final maturity until April 2020 for the credit facilities of SKCC, Yakutugol, CMP, Mechel Service, Mechel Energo,Mechel-Energo, BMP, Port Posiet, Mechel Coke and USP in the total amount of RUB 150,809 million as of December 31, 2016. In April 2017, Gazprombank confirmed the restructuring terms under the relevant credit facilities including an extension of the repayment grace period until 2020 and of the final maturity until 2022 and annual interest rate at the level of the key rate of the Central Bank of Russiathe Russian Federation plus 1.5% for the ruble-denominated credit facilities.
As of December 31, 2017 and 2016, there was no overdue principal amount andIn March 2018, the Group fully repaid the overdue interest on Gazprombankaccrued prior to the credit facilities. Thefacilities restructuring in 2016. Consequently, fines and penalties on overdue amountsin the amount of RUB 7,323 million and RUB 7,450 million were recorded in interest-bearing loans and borrowingsas finance income in the consolidated statement of financial position as of December 31, 2017 and 2016, respectively. The amount of RUB 56 million, RUB 2,031 million and RUB 5,179 million was recorded as finance costs in the consolidated statementstatements of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2017, 2016 and 2015, respectively.2018.
| (d) | Sberbank facilities |
In November 2019, all the ruble-denominated credit facilities of CMP, SKCC and BFP, excluding interest payable for the amount of RUB 182 million, were transferred from Sberbank to VTB according to the assignment agreement between Sberbank and VTB, the terms and conditions remained the same in the assigned agreement.
The outstanding balances of the ruble-denominated facilities as of December 31, 20172019 and 20162018 were RUB 26,459 millionnil and RUB 31,10625,723 million, respectively, bearing interest at 9.3% p.a.respectively.
In 2016, the Group signed restructuring agreements and amicable settlements agreement approved by the courts with Sberbank. Those agreements provided with an extension of the repayment grace period until April 2017Sberbank and, the final maturity until April 2020 (with possibility of extension to April 2020 and April 2022, respectively, if certain conditions are met) for credit facilities in the amount of RUB 41,436 million and with an extension of the repayment grace period until January 2017 and the final maturity until the December 2017 for credit facilities in the amount of RUB 11,481 million. In April 2017, Sberbank confirmed the restructuring terms
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
under the relevant credit facilities including an extension of the repayment grace period until 2020 and the final maturity until 2022 and annual interest rate at the level of the key rate of the Central Bank of Russiathe Russian Federation plus 1.5% for the ruble-denominated credit facilities and 3M LIBOR plus 7% for the U.S. dollar-denominated credit facilities. According to
In November 2019, all the restructuring agreements, fines and penalties were fixedU.S. dollar-denominated credit facilities of SKCC, excluding interest payable for the amount of RUB 370 million ($5,984 thousand at RUB 1.7 billion (at exchange rate as of December 31, 2015).
In April 2017, the U.S. dollar-denominated credit facilities of MTAG2019), were transferred from Sberbank to VTB according to the assignment agreement between Sberbank and VTB. VTB, the terms and conditions remained the same in the assigned agreement.
The outstanding balances of the U.S. dollar-denominated facilities as of December 31, 20172019 and 20162018 were nil and RUB 14,62623,147 million ($253,927333,198 thousand at exchange rate as of December 31, 2017) and RUB 21,811 million ($359,587 thousand at exchange rate as of December 31, 2016)2018), respectively, bearing interest at 8.4% p.a.
In October 2017, the Group signed amendment agreements with Sberbank that extend the payment of RUB 7,000 million that was due on October 15, 2017 until the end of May 2018 for the amount of RUB 2,000 million and until April 2022 for the remaining amount to be paid starting January 2020.
respectively. As of December 31, 20172019 and 2016,2018, there were no overdue principal amount and overdue interest on the Sberbank credit facilities. The fines and penalties on overdue amounts of RUB 1,872 million and RUB 2,311 million were recorded in interest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2017 and 2016, respectively. The amount of RUB 4 million, RUB 2,244 million and RUB 2,699 million was recorded as finance costs in the consolidated statement of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2017, 2016 and 2015, respectively.
| (e) | VEB facility |
In September 2017, the Group signed a new credit agreement, providing the Group with refinancing of existing credit facilities and the final maturity until April 20224.2022. According to the agreement, VEB provided a credit facility in the amount of up to $190 million to refinance existing credit facilities.
The Elgaugol’s outstanding balances under VEB credit facility as of December 31, 20172019 and 20162018 were RUB 10,0907,000 million ($175,172113,069 thousand at exchange rate as of December 31, 2017)2019) and RUB 10,1478,794 million ($167,288126,583 thousand at exchange rate as of December 31, 2016)2018), respectively, bearing interest at 5.5% p.a.
As of December 31, 2017,2019 and 2018, there were no overdue principal amount and overdue interest on the VEB credit facilities. As of December 31, 2016, the Group’s overdue principal amount and overdue interest payable on VEB credit facilities amounted to RUB 8,882 million ($146,438 thousand at exchange rate as of December 31, 2016) and RUB 374 million ($6,163 thousand at exchange rate as of December 31, 2016), respectively. The use of proceeds under the facility is limited to the development of the Elga coal project.
There were no
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (f) | Bonds |
During 2009-2011, Mechel PAO placed a number of issues of the 5,000,000 ruble-denominated bonds each in an aggregate principal amount of RUB 40,000 million with maturity dates between February 2020 — July 2021. The range of coupon interest rate as of December 31, 2019 varies from 8.0% p.a. to 11.9% p.a.
| (g) | Other loans |
Other loans represent the Russian ruble, U.S. dollar and euro-denominated long-term and short-term loans bearing interest at 0.8%-10.9% p.a. The outstanding balance under other loan agreements amounted to RUB 31,258 million and RUB 41,887 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019, the Group’s overdue principal amount and overdue interest on other loans amounted to RUB 25,354 million and RUB 1,563 million, respectively, as of December 31, 2018 — RUB 25,209 million and RUB 1,726 million, respectively. The fines and penalties on overdue amounts of RUB 2,097 million and RUB 1,622 million were recorded in interest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2017. As of December 31, 2016,2019 and 2018, respectively. The fines and penalties on overdue amounts of RUB 24 million were recorded in interest-bearing loans and borrowings in the consolidated statement of financial position. The amount of RUB 9733 million, RUB 10858 million and RUB 91,038 million waswere recorded as finance costs in the consolidated statements of profit (loss) and other comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015, respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
On July 30, 2009, Mechel PAO issued 5,000,000 ruble-denominated bonds in an aggregate principal amount of RUB 5,000 million. The coupon interest rate as of December 31, 2017 amounted to 11.5% p.a. The maturity date is July 15, 2021. The balance outstanding as of December 31, 2017 was RUB 1,321 million, including RUB 352 million classified as short-term debt2019, 2018 and RUB 969 million classified as long-term debt.
On September 7, 2010, Mechel PAO placed two issues of 5,000,000 ruble-denominated bonds each in an aggregate principal amount of RUB 10,000 million. The coupon interest rate as of December 31, 2017, amounted to 14.0% p.a. The maturity date is February 25, 2020. The balance outstanding as of December 31, 2017 was RUB 3,164 million, including RUB 973 million classified asshort-term debt and RUB 2,191 million classified as long-term debt.
On February 22, 2011, Mechel PAO placed two issues of 5,000,000 ruble-denominated bonds each in an aggregate principal amount of RUB 10,000 million. The coupon interest rate as of December 31, 2017 amounted to 8.0% p.a. The maturity date is February 9, 2021. The balance outstanding as of December 31, 2017 was RUB 820 million and was classified as long-term debt that should be paid in 2021.
On June 9, 2011, Mechel PAO placed two issues of 5,000,000 ruble-denominated bonds each in an aggregate principal amount of RUB 10,000 million. The coupon interest rate as of December 31, 2017 amounted to 12.1% p.a. The maturity date is May 27, 2021. The balance outstanding as of December 31, 2017 was RUB 5,696 million, including RUB 1,583 million classified asshort-term debt and RUB 4,113 million classified as long-term debt.
On June 14, 2011, Mechel PAO issued 5,000,000 ruble-denominated bonds in an aggregate principal amount of RUB 5,000 million. The coupon interest rate as of December 31, 2017 amounted to 12.1% p.a. The maturity date is June 1, 2021. The balance outstanding as of December 31, 2017 was RUB 3,458 million, including RUB 988 million classified asshort-term debt and RUB 2,470 million classified as long-term debt.
Other loans represent Russian ruble, U.S. dollar and euro-denominated long-term and short-term loans bearing interest at0.8%-15% p.a. The outstanding balance under other loan agreements amounted to RUB 44,123 million and RUB 40,350 million as of December 31, 2017 and 2016, respectively.
As of December 31, 2017, the Group’s overdue principal amount and overdue interest on other loans amounted to RUB 17,409 million and RUB 1,527 million, respectively, as of December 31, 2016 — RUB 11,447 million and RUB 1,120 million, respectively. The fines and penalties on overdue amounts of RUB 2,182 million and RUB 1,276 million were recorded ininterest-bearing loans and borrowings in the consolidated statement of financial position as of December 31, 2017 and 2016, respectively. The amount of RUB 1,038 million, RUB 642 million and RUB 769 million was recorded as finance costs in the consolidated statements of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2017, 2016 and 2015, respectively. The amount of RUB 149 million of waived fines and penalties (due to the restructuring of Eurasian Development Bank credit facilities) was recorded as finance income in the consolidated statements of profit (loss) and other comprehensive income (loss) for the year ended December 31, 2017.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
In 2010-2016,2010-2017, the Group signed revolving credit agreements for working capital financing up to RUB 3,3344,512 million with several banks. These revolving credit lines allow the Group to withdraw, repay andre-draw in the agreed amounts, timing and number of times until the arrangement expires. Borrowings bear interest at5.3-7.0% p.a.
| (h) | Pledges |
In order to secure bank financings, the Group pledged shares in certain key subsidiaries, including 100% - 1 share of Yakutugol, 95% + 43 shares of SKCC, 91.66% of shares of CMP, 50% + 2 shares of common shares of BMP, 80% + 32 shares of KMP, 87.5%+3 shares of Mechel Mining, 80% - 575% + 2 shares of USP, 33.33%25% + 1 share of common shares of Izhstal, 25% + 1 share of Port Posiet, 50.99% of registered capital of Elgaugol, 25% of registered capital of Mecheltrans, 100% of registered capital of Fincom-invest OOO, 25% of registered capital of BFP, 25% of registered capital of Port Temryuk, 1.99% of registered capital of Mecheltrans Vostok OOO, 1.99% of registered capital of Elga-road as of December 31, 2017.2019.
As of December 31, 20172019 and 2016,2018, the carrying value of property, plant and equipment pledged under the loan agreements amounted to RUB 121,926116,717 million and RUB 117,047117,370 million, respectively (Note 16)15). Carrying value of inventories pledged under the loan agreements amounted to RUB 2,4502,931 million and RUB 3,6683,472 million as of December 31, 20172019 and 2016,2018, respectively. Accounts receivable pledged as of December 31, 20172019 and 20162018 amounted to RUB 372179 million and RUB 2381,044 million, respectively. Additionally, CMP pledged its rights to receive future payments (revenue) related to the contract with Russian Railways JSC in the amount of RUB 5,7606,191 million ($100 million).53
| 3 | CMP’s accounts receivable from Russian Railways JSC as of December 31, 2019 amounted to RUB 695 million. |
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| (i) | Covenants |
The Group’s loan agreements contain a number of covenants and restrictions, which include, but are not limited to, financial ratios, minimum value of shareholders’ equity and certain cross-default provisions. The covenants also include, among other restrictions, limitations on: (1) raising of additional borrowings; (2) amount of dividends in common and preferred shares; and (3) amounts that can be spent for capital expenditures, new investments and acquisitions. Covenant breaches if not waived generally permit lenders to demand accelerated repayment of principal and interest.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group was required to comply with the following ratios under the most significant loan agreements with the Russian state-controlled banks as of December 31, 2017201964:
Restrictive | Requirement | Actual as of December 31, 2019 | |||||
| Shall not be less than | 1.36:1.0 | |||||
| Shall not be less than | 1.40:1.0 | |||||
| Shall not exceed | 8.85:1.0 | |||||
| Shall not exceed | 8.51:1.0 | |||||
| Shall not be less than | 1.08:1.0 | |||||
| Shall not be less than | 0.18:1.0 | |||||
As of December 31, 2017, the Group was in compliance with the majority of Group’s restrictive financial covenants under the restructured loan agreements with the Russian state banks (Gazprombank, Sberbank and VTB). However,2019, the Group was not in compliance with all major covenants set by the loan agreements with Gazprombank and Sberbank (such as Total Debt to EBITDA ratio andthe Russian state-controlled banks, except for the Cash flow from operating activities to EBITDA ratio). TheEBITDA. Also, the Group was not in compliance with covenants contained in the loan agreements with foreign banks (such as Net Borrowings to EBITDA ratio, EBITDA to Net Interest Expense ratio and targeted amount of Adjusted Shareholder’s Equity). There was a default on payments of principal and interest in the amount of RUB 75,23725,354 million and RUB 12,7251,563 million, respectively, which is represented primarily by the default of thepre-export facility agreement (Note 11.1(a)) andECA-covered loans (represented by the credit facilities of BNP, BNL, ING, RaiffeisenNatWest, Deutsche Bank AG and other international banks — Note 11.1(g))banks). As a result, the long-term debt of RUB 284,156220,046 million was reclassified to short-term liabilities as of December 31, 2017.2019.
10.2 Financial instruments risk management objectives and policies
The Group is exposed to foreign currency risk, credit risk and liquidity risk. Management reviews and agrees policies for managing each of these risks, which are summarised below.
Liquidity risk
Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Group has procedures with the objective of minimizing such losses such as maintaining sufficient cash and other highly liquid current assets to meet its liabilities as and when they fall due.
As of December 31, 2017, the Group was in breach of a number of financial andnon-financial covenants contained in the Group’s loan agreements which led to cross-defaults under other loan and finance lease agreements, permitting the respective lenders under such other facilities to accelerate the payment of principal and interest under their loans.
Net Debt and Total Debt are calculated according to the respective definitions set by the credit agreements. Generally, Total Debt includes outstanding loans, |
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
As of December 31, 2019, the Group was in breach of a number of financial and non-financial covenants contained in the Group’s loan agreements which led to cross-defaults under other loan and lease agreements, permitting the respective lenders under such other facilities to accelerate the payment of principal and interest under their loans.
The following tables show the remaining contractual maturities at the reporting date of the Group’snon-derivative financial liabilities, which are based on contractual undiscounted cash flows (including interest payment computed using contractual rates, or if floating, based on rates current at the reporting date) and the earliest the Group can be required to pay.
| Maturity | Maturity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | |||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and borrowings, including interest payable | 416,316 | 9,959 | 6,678 | 7,293 | 5,215 | 1,651 | 447,112 | 373,799 | 7,998 | 5,024 | 2,325 | 14 | 70 | 389,230 | ||||||||||||||||||||||||||||||||||||||||||
Finance lease liabilities | 4,075 | 4,625 | 633 | 584 | 557 | 526 | 11,000 | |||||||||||||||||||||||||||||||||||||||||||||||||
Lease liabilities | 8,802 | 3,992 | 3,122 | 1,230 | 643 | 12,515 | 30,304 | |||||||||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | 394 | 29,540 | 542 | 166 | 0 | 0 | 30,642 | 20,210 | 14,642 | — | — | — | — | 34,852 | ||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities | 0 | 869 | 0 | 0 | 55,905 | 0 | 56,774 | — | — | 54,450 | 38 | 38 | 19 | 54,545 | ||||||||||||||||||||||||||||||||||||||||||
| Maturity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and borrowings, including interest payable | 428,597 | 8,496 | 4,688 | 4,648 | 3,593 | 2,455 | 452,477 | |||||||||||||||||||||||||||||||||||||||||||||||||
Finance lease liabilities | 7,857 | 4,456 | 280 | 106 | 83 | 61 | 12,843 | |||||||||||||||||||||||||||||||||||||||||||||||||
Trade and other payables | 435 | 37,231 | 448 | 181 | — | — | 38,295 | |||||||||||||||||||||||||||||||||||||||||||||||||
Other financial liabilities | — | — | — | — | — | 60,475 | 60,475 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Maturity | ||||||||||||||||||||||||||||
| On demand | Within 1 year | More than 1 year but less than 2 years | More than 2 years but less than 3 years | More than 3 years but less than 4 years | More than 4 years | Total | ||||||||||||||||||||||
At December 31, 2018 | ||||||||||||||||||||||||||||
Loans and borrowings, including interest payable | 406,337 | 7,185 | 4,520 | 2,550 | 16 | 119 | 420,727 | |||||||||||||||||||||
Lease liabilities | 1,664 | 5,186 | 908 | 886 | 745 | 350 | 9,739 | |||||||||||||||||||||
Trade and other payables | 15,891 | 15,270 | 352 | 186 | 16 | — | 31,715 | |||||||||||||||||||||
Other financial liabilities | — | — | — | 55,742 | — | — | 55,742 | |||||||||||||||||||||
Credit risk
Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date.
The Group is exposed to credit risk from its operating activities (primarily trade receivables)receivables (Note 12)) and from its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.
Customer credit risk is managed by each subsidiary subject to the Group’s established policy, procedures and control relating to customer credit risk management. Credit quality of a customer is assessed and individual credit limits are defined in accordance with this assessment. Outstanding customer receivables are regularly monitored.
The contractual credit period for sales of goods is about 30 days on average. No interest is charged on trade receivables.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
An impairment analysis is performed at each reporting date on an individual basis for major clients.customers. In addition, a large number of minor receivables are grouped into homogenous groups and assessed for impairment collectively. The calculation is based on actual incurred historical data.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Based on the results of impairment analysis the allowance for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
expected credit losses on receivables is recognised (Note 12).
The maximum exposure to credit risk arising from the Group’s financial assets is presented as follows:
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Restricted cash (excluding cash on hand) | 20 | 24 | 147 | 51 | ||||||||||||
Cash deposits | 1,074 | 494 | ||||||||||||||
Trade and other receivables | 18,825 | 19,121 | 15,442 | 17,718 | ||||||||||||
Other financial assets | 795 | 415 | 382 | 533 | ||||||||||||
— Promissory notes | 210 | 208 | — | 212 | ||||||||||||
— Loans issued | 571 | 61 | 368 | 305 | ||||||||||||
— Bonds | 14 | 13 | 14 | 16 | ||||||||||||
— Deposits | 0 | 133 | ||||||||||||||
|
|
|
| |||||||||||||
Total | 19,640 | 19,560 | 17,045 | 18,796 | ||||||||||||
|
|
|
| |||||||||||||
The Group evaluates the concentration of risk with respect to trade receivables as low, as its customers are located in several jurisdictions and industries and operate in largely independent markets.
Foreign currency risk
Foreign currency risk is the risk that the value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchanges rates. This risk arises when commercial transactions and recognised assets and liabilities are denominated in a currency different from the Group’s functional currencies.
The Group undertakes transactions denominated in foreign currencies and consequently is exposed to foreign currency risk. Approximately 22%26% of the Group’s sales are denominated in U.S. dollars and 12%11% of the Group’s sales are denominated in euro, 28%13% of the Group’s borrowings are denominated in U.S. dollars and 6%22% of the Group’s borrowings are denominated in euro. The Group does not have formal arrangements to mitigate foreign currency risk. However, management of the Group believes that the foreign currency risk is partly mitigated for the Group by the situation where approximately 34% of totalfrom sales of the Group are denominated in U.S. dollars and euros that reduces the negative impact of changes ineuro is partly mitigated by foreign exchange rates for(loss) gain from the Group’s borrowings and purchases denominated in foreign currencies, mostly in euro and U.S. dollars.
The Group’s exposure at the reporting date to foreign currency risk arising from recognised assets and liabilities denominated in a currency other than the functional currency of the entity to which they relate to is set out in the table below:
Assets and liabilities denominated in U.S. dollars | December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | ||||||||||||
Current assets | 829 | 225 | 639 | 157 | ||||||||||||
Receivables | 111 | 156 | ||||||||||||||
Trade and other receivables | 172 | 27 | ||||||||||||||
Cash and cash equivalents | 718 | 69 | 467 | 130 | ||||||||||||
Non-current liabilities | (4,667 | ) | — | |||||||||||||
Loans and borrowings | (4,667 | ) | — | |||||||||||||
Current liabilities | (118,677 | ) | (124,281 | ) | (41,047 | ) | (54,954 | ) | ||||||||
Short-term loans and borrowings | (112,277 | ) | (113,327 | ) | ||||||||||||
Short-term payables | (5,614 | ) | (9,433 | ) | ||||||||||||
Short-term finance lease liability | (786 | ) | (1,521 | ) | ||||||||||||
Loans and borrowings | (38,861 | ) | (51,732 | ) | ||||||||||||
Trade and other payables | (2,186 | ) | (3,222 | ) | ||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Assets and liabilities denominated in euro | December 31, 2017 | December 31, 2016 | ||||||
Current assets | 746 | 534 | ||||||
Receivables | 711 | 353 | ||||||
Cash and cash equivalents | 35 | 181 | ||||||
Non-current liabilities | (88 | ) | (38 | ) | ||||
Long-term loans and borrowings | 0 | (38 | ) | |||||
Long-term finance lease liability | (88 | ) | — | |||||
Current liabilities | (27,399 | ) | (23,766 | ) | ||||
Short-term loans and borrowings | (25,304 | ) | (22,817 | ) | ||||
Short-term payables | (2,064 | ) | (838 | ) | ||||
Short-term finance lease liability | (31 | ) | (111 | ) | ||||
Currency exchange rates | December 31, 2017 | December 31, 2016 | ||||||
U.S. dollar | 57.6002 | 60.6569 | ||||||
Euro | 68.8668 | 63.8111 | ||||||
Assets and liabilities denominated in euro | December 31, 2019 | December 31, 2018 | ||||||
Current assets | 171 | 812 | ||||||
Trade and other receivables | 63 | 510 | ||||||
Cash and cash equivalents | 108 | 302 | ||||||
Non-current liabilities | (148 | ) | (219 | ) | ||||
Lease liabilities | (148 | ) | (219 | ) | ||||
Current liabilities | (88,794 | ) | (101,294 | ) | ||||
Loans and borrowings | (86,213 | ) | (98,285 | ) | ||||
Trade and other payables | (2,499 | ) | (2,953 | ) | ||||
Lease liabilities | (82 | ) | (56 | ) | ||||
Sensitivity analysis
The table below demonstrates the Group’s sensitivity to a devaluation of the Russian ruble against U.S. dollar and euro which management believes is an appropriate measure in the current market conditions and which would impact its operations:
| Change in U.S. dollar to Russian ruble exchange rate | Effect on profit before tax | Change in Euro to Russian ruble exchange rate | Effect on profit before tax | |||||||||||||
2015 | ||||||||||||||||
| +40 | % | 119,557 | +40 | % | 11,082 | |||||||||||
| -15 | % | (44,834 | ) | -15 | % | (4,156 | ) | |||||||||
2016 | ||||||||||||||||
| +20 | % | 24,811 | +20 | % | 4,654 | |||||||||||
| -20 | % | (24,811 | ) | -20 | % | (4,654 | ) | |||||||||
2017 | ||||||||||||||||
| +10 | % | 11,785 | +10 | % | 2,674 | |||||||||||
| -10 | % | (11,785 | ) | -10 | % | (2,674 | ) | |||||||||
| Change in U.S. dollar to Russian ruble exchange rate | Effect ((decrease)/ increase) on profit before tax | Change in Euro to Russian ruble exchange rate | Effect ((decrease)/ increase) on profit before tax | |||||||||||||
2017 | +10 | % | (11,785 | ) | +10 | % | (2,674 | ) | ||||||||
| -10 | % | 11,785 | -10 | % | 2,674 | |||||||||||
2018 | +14 | % | (7,672 | ) | +14 | % | (14,098 | ) | ||||||||
| -14 | % | 7,672 | -14 | % | 14,098 | |||||||||||
2019 | +13 | % | (5,860 | ) | +13 | % | (11,540 | ) | ||||||||
| -11 | % | 4,958 | -11 | % | 9,765 | |||||||||||
Interest rate risk
Interest rate risk is the risk that changes in floating interest rates will adversely impactimpacts the financial results of the Group. As of December 31, 20172019 and 2016,2018, the sharesshare of the borrowings with floating rates in the total amount of the borrowings were 95%97% (incl. Mosprime – 0.03%, key rate of the Central Bank of Russiathe Russian Federation – 66%65%, LIBOR, EURIBOR and othersother – 29%32%) and 91%95% (incl. Mosprime – 0.1%, key rate of the Central Bank of Russiathe Russian Federation – 62%, LIBOR, EURIBOR and othersother – 29%33%), respectively.
The table below demonstrates the Group’s sensitivity to the change of floating rates:
| Increase/decrease in the key rate of the Central Bank of Russian Federation (%) | Effect ((decrease)/ increase) on profit before tax | Increase/ decrease in LIBOR (%) | Effect ((decrease)/ increase) on profit before tax | Increase/ decrease in EURIBOR (%) | Effect ((decrease)/ increase) on profit before tax | |||||||||||||||||||
2017 | +1.00 | % | (2,744 | ) | +0.48 | % | (500 | ) | +0.04 | % | (8 | ) | ||||||||||||
| -2.00 | % | 5,488 | -0.24 | % | 250 | -0.08 | % | 16 | ||||||||||||||||
2018 | +0.75 | % | (1,922 | ) | +0.50 | % | (226 | ) | +0.20 | % | (190 | ) | ||||||||||||
| -1.00 | % | 2,563 | -0.15 | % | 68 | -0.01 | % | 9 | ||||||||||||||||
2019 | +1.25 | % | (3,116 | ) | +0.35 | % | (145 | ) | +0.15 | % | (126 | ) | ||||||||||||
| -1.25 | % | 3,116 | -0.35 | % | 145 | -0.15 | % | 126 | ||||||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The table below demonstrates the Group’s sensitivity to the change of floating rates.
| Increase/ decrease in MosPrime and Central Bank of Russia rate (%) | Effect on profit before tax | Increase/ decrease in LIBOR (%) | Effect on profit before tax | Increase/ decrease in EURIBOR (%) | Effect on profit before tax | |||||||||||||||||||
2015 | ||||||||||||||||||||||||
| +6 | % | 3,312 | +0.5 | % | 662 | +0.25 | % | 62 | ||||||||||||||||
| -5 | % | (2,760 | ) | -0.12 | % | (159 | ) | -0.25 | % | (62 | ) | |||||||||||||
2016 | ||||||||||||||||||||||||
| +2 | % | 4,943 | +0.6 | % | 736 | +0.12 | % | 28 | ||||||||||||||||
| -4 | % | (9,887 | ) | -0.08 | % | (98 | ) | -0.08 | % | (19 | ) | |||||||||||||
2017 | ||||||||||||||||||||||||
| +1 | % | 2,744 | +0.48 | % | 500 | +0.04 | % | 8 | ||||||||||||||||
| -2 | % | (5,488 | ) | -0.24 | % | (250 | ) | -0.08 | % | (16 | ) | |||||||||||||
Other current financial assets |
In November 2011, the owners of the metallurgical plants (refer to Note 9(b)8(a)) and the Group entered into a loan agreement pursuant to which a loan of $944,530 thousand (RUB 28,433 million at exchange rate as of November 10, 2011) was granted by the Group. The loan consists of several tranches which bear interest at the range of1-8.5% p.a. To secure the loan, shares in the major metallurgical plants (or shares in parent companies of such metallurgical plants) were pledged. The proceeds from this loan were used by the metallurgical plants to repay most of the accounts receivable owed to the Group. According to the loan agreement, in the event that the loan is not repaid at maturity (September 30, 2012), the Group was entitled to enforce the pledge over the pledged metallurgical plants assets and thereby take control of these assets subject to approval from the Russian Federal Antimonopoly Service. The Group has not taken possession of assets provided as collateral because these entities are under the bankruptcy procedure and burdened with substantial amount of debt.
The Group evaluates the recoverability of the loan based on the fair value of the pledged assets. As of December 31, 2017, 20162019, 2018 and 2015,2017, this loan in the amount of RUB 9,8007,992 million, RUB 50,32010,240 million and RUB 60,6209,800 million, respectively, was fully provided for as the fair value of the pledged assets was nil as at these dates.
In 2017,2019, this loan was partially written off in the amount of $664,556$34,929 thousand (RUB 39,2972,250 million as at exchange rate at March 14, 2017)the dates of transactions) due to liquidation of certain debtors.
Othernon-current financial liabilities |
The Group recognizedrecognised othernon-current financial liabilities under the put option of Gazprombank (see Note 6) in the amount of RUB 40,26048,201 million as of December 31, 20172019 and RUB 36,19844,056 million as of December 31, 20162018 (estimated at the present value of the consideration to be transferred upon the exercise of the put option discounted at the key rate of the Central Bank of Russiathe Russian Federation plus 2%). The respective finance cost was recognizedrecognised in the consolidated statement of profit (loss) and other comprehensive income (loss) in the amount of RUB 4,0624,145 million, RUB 3,796 million and RUB 1,8984,062 million for 20172019, 2018 and 2016,2017, respectively (Note 25.5)24.4).
On August 23, 2019, the Group received the offer from Gazprombank to acquire a 34% stake in the Elga coal complex. The offer expired on January 20, 2020 and the Group did not exercise its preemptive right under the offer. Gazprombank still has put option to sell the stake (in full or in part) in the Elga coal complex to the Group within three years following a five-year grace period or in case of a breach of conditions stipulated by the put option agreement signed in 2016.
Other current financial liabilities |
As a part of the restructuring requirements of the credit facility with VTB,requirement, in January 2017, the Group signed a call option agreement with VTB providing VTB with an option to acquire a 5% stake (6,937,846
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
preferred shares) of the preferred shares of the Group at a price of 47.3682 rubles per share or to pay cash to VTB in the amount calculated as a difference between the weighted average market value of preferred shares for the last six months from the date of the call from the VTB and the price of 47.3682 rubles per share or combination of these two options. Until the execution of the call option 6,937,846 preferred shares are pledged.Mechel PAO.
At the date of the call option agreement, the Group recognizedrecognised the financial liability at fair value in the amount of RUB 815 million. The corresponding amount was capitalized as restructuring fees within Interest-bearing loans and borrowings considering this call option agreement as part of the restructuring requirement.
In April 2017,
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
On August 10, 2018, VTB notified the Group of its decision to exercise the option. option and receive cash of RUB 442 million. On August 22, 2018, RUB 442 million has been paid by the Group in full.
| 10.6 | Leases |
The Group has requestedlease contracts for various items of land, operating machinery and equipment and transportation vehicles. None of them meets the definition of investment property. The Group presents right-of-use assets within property, plant and equipment in the consolidated statement of financial position.
Set out below are the carrying amounts of right-of-use assets recognised and the movements during the period:
| Land | Buildings and constructions | Operating machinery and equipment | Transportation vehicles | Total | ||||||||||||||||
At January 1, 2019 | — | — | 643 | 9,469 | 10,112 | |||||||||||||||
Adjustment on initial application of IFRS 16 | 1,932 | 681 | 73 | 12 | 2,698 | |||||||||||||||
Additions | 200 | 541 | 405 | 7,401 | 8,547 | |||||||||||||||
Depreciation charge | (72 | ) | (138 | ) | (204 | ) | (2,587 | ) | (3,001 | ) | ||||||||||
Disposals | (9 | ) | — | (6 | ) | (2 | ) | (17 | ) | |||||||||||
Impairment | (72 | ) | — | (19 | ) | (363 | ) | (454 | ) | |||||||||||
Transfer to own property, plant and equipment | — | — | (114 | ) | (1 | ) | (115 | ) | ||||||||||||
Exchange differences | (1 | ) | (23 | ) | (15 | ) | (3 | ) | (42 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At December, 31 2019 | 1,978 | 1,061 | 763 | 13,926 | 17,728 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The Group presents lease liabilities separately from other liabilities in the consolidated statement of financial position.
The following amounts related to extend the start daylease were recognised for the reporting period:
| 2019 | ||||
The maturity analysis of lease liabilities | Note 10.2 | |||
The cash flow effect of sale and leaseback transactions (net increase, consolidated statement of cash flows) | 248 | |||
Interest expense on lease liabilities (Note 24.4) | 1,409 | |||
Expense relating to short-term leases | 1,536 | |||
Commitments for short-term leases as of December 31 | 62 | |||
The total cash outflow for leases | 5,404 | |||
The Group’s lease contracts contain a number of the option period by one year till April 1, 2018. On August 9, 2017,restrictions, which included but not limited to, overdue principal and cross-default provisions. As of December 31, 2019 and 2018, the Group was not in compliance with the payment schedules under certain lease contracts and VTB signed an amendment agreement postponing the option period start date till April 1, 2018, removing an option to acquire 5% of preferred shares and granting VTBGroup’s loan agreements. As a result, the right to receive only a cash consideration in the amount equal to the higherrelated long-term lease liabilities of RUB 6205,480 million or the amount calculatedand RUB 1,320 million were reclassified to short-term lease liabilities due to covenant violations as a difference between the weighted average market value of preferred shares December 31, 2019 and 2018, respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the last six months fromyear ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
In June 2019, the dateGroup has extended a contract for lease of the call from VTBrailway carriages until July 2021 resulting in addition to right-of-use assets and the price of 47.3682 rubles per share multiplied by the number of option shares. Respective financial liability is accounted for at fair value and was included in other current financiallease liabilities recognised in the amount of RUB 734 million4,862 million. Until May 2019, the contract for lease of these railway carriages was short-term and contract expense was recognised within expense relating to short-term leases.
The Group has lease contracts that have not yet commenced as of December 31, 2017.2019 with the future lease payments of RUB 45 million within one year, RUB 110 million within five years and RUB 1 million thereafter.
Inventories |
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Raw materials | 15,050 | 13,666 | 13,643 | 14,980 | ||||||||||||
Work in progress | 6,990 | 5,654 | 8,565 | 8,681 | ||||||||||||
Finished goods and goods for resale | 15,950 | 15,907 | 17,565 | 19,762 | ||||||||||||
|
|
|
| |||||||||||||
Total inventories at the lower of cost and net realizable value | 37,990 | 35,227 | ||||||||||||||
Total inventories at the lower of cost and net realisable value | 39,773 | 43,423 | ||||||||||||||
|
|
|
| |||||||||||||
During 2017,2019, RUB 4701,763 million (2016:(2018: RUB 3641,162 million, 2015:2017: RUB 1,003470 million) was recognised as an expense within cost of sales for inventories carried at net realisable value. The amount of inventories recognised as an expense during the period was RUB 102,61393,837 million for 2017 (2016:2019 (2018: RUB 95,019115,126 million, 2015:2017: RUB 100,577102,613 million).
Trade and other receivables |
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Trade receivables, including | 23,878 | 24,325 | ||||||||||||||
Trade receivables, including from contracts with | 21,262 | 24,039 | ||||||||||||||
— domestic customers | 19,064 | 20,436 | 18,251 | 19,037 | ||||||||||||
— foreign customers | 4,814 | 3,889 | 3,011 | 5,002 | ||||||||||||
Less allowance for expected credit losses on trade receivables | (6,200 | ) | (6,749 | ) | ||||||||||||
|
| |||||||||||||||
Total trade receivables, net | 15,062 | 17,290 | ||||||||||||||
|
| |||||||||||||||
Other receivables | 3,967 | 28,670 | 2,933 | 3,410 | ||||||||||||
Less allowance for expected credit losses on other receivables | (2,655 | ) | (3,088 | ) | ||||||||||||
|
|
|
| |||||||||||||
Total trade and other receivables | 27,845 | 52,995 | ||||||||||||||
Less allowance for doubtful accounts | (9,083 | ) | (33,941 | ) | ||||||||||||
Total other receivables, net | 278 | 322 | ||||||||||||||
|
|
|
| |||||||||||||
Total accounts receivable, net | 18,762 | 19,054 | 15,340 | 17,612 | ||||||||||||
|
|
|
| |||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
As of December 31, 2016, receivables from related parties inSet out below is the amount of RUB 24,539 million are included into Other receivables. The amounts are fully covered byinformation about the allowance (Note 9(b)).
As of December 31, 2017 and 2016,credit risk exposure on the ageing analysis ofGroup’s trade receivables was as follows:
| December 31, 2017 | December 31, 2016 | |||||||
Total receivables | 27,845 | 52,995 | ||||||
|
|
|
| |||||
Past due but not impaired | ||||||||
=<30 days | 2,423 | 2,739 | ||||||
31-60 days | 503 | 528 | ||||||
61-90 days | 180 | 201 | ||||||
91-180 days | 332 | 476 | ||||||
181-365 days | 314 | 362 | ||||||
>1 year | 214 | 183 | ||||||
|
|
|
| |||||
Total past due but not impaired | 3,966 | 4,489 | ||||||
|
|
|
| |||||
Receivables that were past due but not impaired amounted to RUB 3,966 million and RUB 4,489 millionby ageing as of December 31, 20172019 and 2016, respectively. Based on past experience, management believes that no allowance is necessary in respect of receivables that were past due but not impaired as there has not been a significant change in credit quality and the balances are still considered fully recoverable. 2018:
| December 31, 2019 | December 31, 2018 | |||||||||||||||
| Trade receivables | Expected credit losses | Trade receivables | Expected credit losses | |||||||||||||
Current | 11,907 | (169 | ) | 14,734 | (659 | ) | ||||||||||
=<30 days | 2,154 | (59 | ) | 2,178 | (106 | ) | ||||||||||
31-60 days | 504 | (99 | ) | 497 | (62 | ) | ||||||||||
61-90 days | 355 | (126 | ) | 199 | (57 | ) | ||||||||||
91-180 days | 444 | (134 | ) | 334 | (142 | ) | ||||||||||
181-365 days | 659 | (565 | ) | 579 | (377 | ) | ||||||||||
>1 year | 5,239 | (5,048 | ) | 5,518 | (5,346 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total trade receivables | 21,262 | (6,200 | ) | 24,039 | (6,749 | ) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
The Group does not hold any collateral over these balances.
The movements in the allowance for doubtful accountsexpected credit losses on trade and other receivables were as follows:
| Total | ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
At December 31, 2016 | (33,941 | ) | ||
Charge for the year | (343 | ) | ||
Utilised amounts | 603 | |||
Reclassified tonon-current financial assets (Note | 24,391 | |||
Exchange rate difference | 207 | |||
|
| |||
At December 31, 2017 | (9,083 | ) | ||
Charge for the year | (791 | ) | ||
Utilised amounts | 575 | |||
Exchange rate difference | (538 | ) | ||
At December 31, 2018 | (9,837 | ) | ||
Charge for the year | (226 | ) | ||
Utilised amounts | 800 | |||
Exchange rate difference | 408 | |||
At December 31, 2019 | (8,855 | ) | ||
|
| |||
| 13. | Other current and non-current assets |
| December 31, 2019 | December 31, 2018 | |||||||
Other current assets | ||||||||
Prepayments and advances | 2,930 | 4,778 | ||||||
Input VAT and other taxes recoverable | 3,970 | 3,758 | ||||||
Other current assets | 82 | 137 | ||||||
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|
|
| |||||
Total prepayments and other current assets | 6,982 | 8,673 | ||||||
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|
|
| |||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| December 31, 2017 | December 31, 2016 | |||||||
Other current assets | ||||||||
Prepayments and advances | 4,049 | 3,873 | ||||||
Input VAT and other taxes recoverable | 3,413 | 3,000 | ||||||
Other current assets | 127 | 69 | ||||||
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|
|
| |||||
Total prepayments and other current assets | 7,589 | 6,942 | ||||||
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|
|
| |||||
| December 31, 2017 | December 31, 2016 | |||||||
Othernon-current assets | ||||||||
Deferred assets from sale and lease back | 273 | 306 | ||||||
Othernon-current assets | 485 | 585 | ||||||
|
|
|
| |||||
Total othernon-current assets | 758 | 891 | ||||||
|
|
|
| |||||
| December 31, 2019 | December 31, 2018 | |||||||
Other non-current assets | ||||||||
Deferred assets from sale and lease back | 208 | 241 | ||||||
Other non-current assets | 345 | 389 | ||||||
|
|
|
| |||||
Total other non-current assets | 553 | 630 | ||||||
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| |||||
Generally in Russia, VAT related to sales is payable to the tax authorities on an accrual basis based upon invoices issued to the customer. VAT incurred on purchases may be reclaimed, subject to certain restrictions, against VAT related to sales.
Reversal of provision for advances issued of RUB 11 million, provision for advances issued of RUB 185 million and RUB 355 million were included in Provision for doubtful accounts in the consolidated statement of profit (loss) and other comprehensive income (loss) for the years ended December 31, 2017, 2016 and 2015.
Cash and cash equivalents |
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Cash on hand | 7 | 8 | 6 | 8 | ||||||||||||
Cash at banks, including | ||||||||||||||||
— in Russian rubles | 617 | 683 | 1,715 | 360 | ||||||||||||
— in U.S. dollars | 1,377 | 482 | 1,081 | 766 | ||||||||||||
— in euro | 305 | 404 | 640 | 596 | ||||||||||||
— in other currencies | 146 | 109 | 160 | 164 | ||||||||||||
Other cash and cash equivalents | 0 | 3 | ||||||||||||||
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|
| |||||||||||||
Total cash and cash equivalents | 2,452 | 1,689 | 3,602 | 1,894 | ||||||||||||
Less allowance for expected credit losses | (93 | ) | (91 | ) | ||||||||||||
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|
| |||||||||||||
Total cash and cash equivalents, net | 3,509 | 1,803 | ||||||||||||||
|
| |||||||||||||||
For the purpose of the consolidated statement of cash flows, bank overdrafts are deducted from cash and cash equivalents in the amount of RUB1,229RUB 642 million and RUB 2361,423 million as of December 31, 20172019 and 2016,2018, respectively. As of December 31, 20172019 and 2016,2018, the Group had short-term deposits included in cash at banks of RUB 1,062 million and nil, respectively. As of December 31, 2017 and 2016, the amount of RUB 241,074 million and RUB 24494 million, respectively, was restricted for use by regulatory requirements. As of December 31, 2017 and 2016, the Group had available RUB 475 million and RUB 373 million, respectively, of undrawn committed borrowing facilities.respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Reconciliation between the changes in liabilities arising from financing activities including both changes arising from cash flows andnon-cash changes:
| Interest-bearing loans and borrowings | Finance lease liabilities | Deferred payments for acquisition of assets | Put option of Gazprombank | Other current financial liabilities | Deferred consideration paid for the acquisition of subsidiaries in prior periods | Loans and borrowings | Lease liabilities | Deferred payments for acquisition of assets | Effect of sale and leaseback transactions | Put option of Gazprombank | Other current financial liabilities | Deferred consideration paid for the acquisition of subsidiaries in prior periods | ||||||||||||||||||||||||||||||||||||||||
At December 31, 2014 | 395,864 | 15,359 | — | — | — | 15,888 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flows | (24,775 | ) | (4,309 | ) | — | — | — | (4,819 | ) | |||||||||||||||||||||||||||||||||||||||||||
Foreign exchange movement | 65,568 | 481 | — | — | — | 3,730 | ||||||||||||||||||||||||||||||||||||||||||||||
Changes in fair value | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Other changes, including interest | 59,325 | 2,457 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2015 | 495,982 | 13,988 | — | — | — | 14,799 | ||||||||||||||||||||||||||||||||||||||||||||||
Cash flows | (70,084 | ) | (5,217 | ) | — | 34,300 | — | (4,732 | ) | |||||||||||||||||||||||||||||||||||||||||||
Foreign exchange movement | (25,303 | ) | (351 | ) | — | — | — | (2,035 | ) | |||||||||||||||||||||||||||||||||||||||||||
Changes in fair value | — | — | — | 1,898 | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
Other changes, including interest | 45,214 | 2,176 | 1,052 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2016 | 445,809 | 10,596 | 1,052 | 36,198 | — | 8,032 | 445,809 | 10,596 | 1,052 | — | 36,198 | — | 8,032 | |||||||||||||||||||||||||||||||||||||||
Cash flows | (42,480 | ) | (4,801 | ) | (455 | ) | 0 | 0 | (3,652 | ) | (42,480 | ) | (4,801 | ) | (455 | ) | — | — | — | (3,652 | ) | |||||||||||||||||||||||||||||||
Foreign exchange movement | (3,942 | ) | (67 | ) | 0 | 0 | 0 | (370 | ) | (3,942 | ) | (67 | ) | — | — | — | — | (370 | ) | |||||||||||||||||||||||||||||||||
Changes in fair value | 0 | 0 | 0 | 4,062 | (81 | ) | 0 | — | — | — | — | — | (81 | ) | — | |||||||||||||||||||||||||||||||||||||
Other changes, including interest | 40,506 | 3,626 | 1,083 | 0 | 815 | 0 | 40,506 | 3,626 | 1,083 | — | 4,062 | 815 | — | |||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | 439,893 | 9,354 | 1,680 | 40,260 | 734 | 4,010 | 439,893 | 9,354 | 1,680 | — | 40,260 | 734 | 4,010 | |||||||||||||||||||||||||||||||||||||||
Cash flows | (52,951 | ) | (3,892 | ) | (629 | ) | — | — | (442 | ) | (3,968 | ) | ||||||||||||||||||||||||||||||||||||||||
Foreign exchange movement | 24,167 | 83 | — | — | — | — | 339 | |||||||||||||||||||||||||||||||||||||||||||||
Changes in fair value | — | — | — | — | — | (292 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||
Other changes, including interest | 7,723 | 2,748 | 379 | — | 3,796 | — | — | |||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2018 | 418,832 | 8,293 | 1,430 | — | 44,056 | — | 381 | |||||||||||||||||||||||||||||||||||||||||||||
Cash flows | (42,831 | ) | (3,488 | ) | (341 | ) | 234 | — | — | (361 | ) | |||||||||||||||||||||||||||||||||||||||||
Foreign exchange movement | (17,636 | ) | (38 | ) | — | — | — | — | (20 | ) | ||||||||||||||||||||||||||||||||||||||||||
Other changes, including interest | 30,157 | 12,588 | 62 | 14 | 4,145 | — | — | |||||||||||||||||||||||||||||||||||||||||||||
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| ||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2019 | 388,522 | 17,355 | 1,151 | 248 | 48,201 | — | — | |||||||||||||||||||||||||||||||||||||||||||||
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The table above does not include dividends paid of RUB 9781,531 million, RUB 71,394 million and RUB 5978 million, acquisition ofnon-controlling interests in subsidiaries of RUB 3,358nil million, RUB nil million and RUB 13,358 million and fines and penalties on overdue finance leases of RUB 1339 million, RUB 12910 million and RUB 52413 million for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively.
The amounts presented in other changes are primarily attributable to interest accrued of RUR 41,528RUB 33,159 million, RUR 45,664RUB 36,660 million and RUR 40,337RUB 41,528 million for the years ended December 31, 2019, 2018 and 2017, 2016respectively (Note 24.4), new lease agreements of RUB 11,234 million (including effect of adoption of IFRS 16 in the amount of RUB 3,259 million), RUB 1,675 million and 2015,RUB 2,295 million for the years ended December 31, 2019, 2018 and 2017, respectively, and effect of restructuring of loans of RUB 25 million, RUB 33,514 million and RUB 264 million for the years ended December 31, 2019, 2018 and 2017, respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Property, plant and equipment |
| Land | Buildings and constructions | Operating machinery and equipment | Transportation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | Total | Land | Buildings and constructions | Operating machinery and equipment | Trans- portation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2014 | 3,122 | 73,577 | 114,942 | 30,902 | 1,299 | 102,538 | 14,109 | — | 340,489 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additions | — | 417 | 1,052 | 508 | 29 | 4,249 | 719 | — | 6,974 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in rehabilitation provision | — | 49 | — | — | — | — | 232 | — | 281 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers | 59 | 4,886 | 1,607 | 171 | 24 | (78,565 | ) | 14 | 71,804 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals | (10 | ) | (474 | ) | (3,196 | ) | (1,170 | ) | (156 | ) | (1,378 | ) | (156 | ) | — | (6,540 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences | 142 | (190 | ) | (174 | ) | (12 | ) | 40 | (8 | ) | — | — | (202 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2015 | 3,313 | 78,265 | 114,231 | 30,399 | 1,236 | 26,836 | 14,918 | 71,804 | 341,002 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Additions | — | 504 | 1,428 | 549 | 25 | 5,027 | 542 | — | 8,075 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in rehabilitation provision | — | 346 | — | — | — | — | (212 | ) | — | 134 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers | 1 | 2,435 | 2,610 | 180 | (209 | ) | (8,393 | ) | 389 | 2,987 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals | (75 | ) | (3,050 | ) | (3,266 | ) | (1,717 | ) | (169 | ) | (2,330 | ) | (536 | ) | — | (11,143 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (190 | ) | (841 | ) | (675 | ) | (120 | ) | (61 | ) | (6 | ) | (1 | ) | — | (1,894 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2016 | 3,049 | 77,659 | 114,328 | 29,291 | 822 | 21,134 | 15,100 | 74,791 | 336,174 | 3,049 | 77,659 | 114,328 | 29,291 | 822 | 21,134 | 15,100 | 74,791 | 336,174 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additions | 6 | 363 | 1,531 | 3,124 | 45 | 5,767 | 1,576 | 0 | 12,412 | 6 | 363 | 1,531 | 3,124 | 45 | 5,767 | 1,576 | — | 12,412 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in rehabilitation provision | 0 | 141 | 0 | 0 | 0 | 0 | (58 | ) | 0 | 83 | — | 141 | — | — | — | — | (58 | ) | — | 83 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers | 0 | 2,934 | 3,360 | 190 | 148 | (7,011 | ) | 362 | 17 | 0 | — | 2,934 | 3,360 | 190 | 148 | (7,011 | ) | 362 | 17 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals | (12 | ) | (432 | ) | (1,713 | ) | (1,795 | ) | (28 | ) | (245 | ) | (3 | ) | 0 | (4,228 | ) | (12 | ) | (432 | ) | (1,713 | ) | (1,795 | ) | (28 | ) | (245 | ) | (3 | ) | — | (4,228 | ) | ||||||||||||||||||||||||||||||||||||||
Exchange differences | 52 | 148 | 132 | 21 | 9 | 0 | 0 | 0 | 362 | 52 | 148 | 132 | 21 | 9 | — | — | — | 362 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2017 | 3,095 | 80,813 | 117,638 | 30,831 | 996 | 19,645 | 16,977 | 74,808 | 344,803 | 3,095 | 80,813 | 117,638 | 30,831 | 996 | 19,645 | 16,977 | 74,808 | 344,803 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additions | 9 | 10 | 2,423 | 2,048 | 83 | 6,851 | 50 | — | 11,474 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in rehabilitation provision | — | (187 | ) | — | — | — | — | (102 | ) | — | (289 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers | 1 | 487 | 2,750 | 251 | 97 | (4,099 | ) | 119 | 394 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals | (255 | ) | (649 | ) | (1,734 | ) | (1,410 | ) | (32 | ) | (509 | ) | (136 | ) | — | (4,725 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences | 91 | 277 | 251 | 40 | 28 | — | — | — | 687 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2018 | 2,941 | 80,751 | 121,328 | 31,760 | 1,172 | 21,888 | 16,908 | 75,202 | 351,950 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment on initial application of IFRS16 | 2,488 | 686 | 73 | 12 | — | — | — | — | 3,259 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Additions | 200 | 568 | 1,585 | 7,683 | 33 | 7,332 | 38 | — | 17,439 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Change in rehabilitation provision | — | 456 | — | — | — | — | 707 | — | 1,163 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfers | (9 | ) | 2,606 | 3,176 | 262 | 21 | (6,752 | ) | (26 | ) | 722 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals | (36 | ) | (241 | ) | (2,415 | ) | (2,159 | ) | (33 | ) | (990 | ) | — | — | (5,874 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (86 | ) | (289 | ) | (240 | ) | (37 | ) | (30 | ) | (2 | ) | — | — | (684 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2019 | 5,498 | 84,537 | 123,507 | 37,521 | 1,163 | 21,476 | 17,627 | 75,924 | 367,253 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Land | Buildings and constructions | Operating machinery and equipment | Transportation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | Total | Land | Buildings and constructions | Operating machinery and equipment | Trans- portation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and impairment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2014 | (130 | ) | (30,910 | ) | (67,122 | ) | (13,808 | ) | (979 | ) | (17 | ) | (3,224 | ) | — | (116,190 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and impairment At December 31, 2016 | (251 | ) | (35,905 | ) | (72,899 | ) | (16,769 | ) | (733 | ) | (1,582 | ) | (3,101 | ) | (581 | ) | (131,821 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation charge | — | (5,008 | ) | (5,627 | ) | (2,745 | ) | (56 | ) | — | (218 | ) | (334 | ) | (13,988 | ) | — | (3,747 | ) | (7,315 | ) | (2,222 | ) | (72 | ) | — | (245 | ) | (235 | ) | (13,836 | ) | ||||||||||||||||||||||||||||||||||||||||
Disposals | 9 | 396 | 2,619 | 1,092 | 146 | 16 | 54 | — | 4,332 | — | 302 | 1,611 | 1,720 | 22 | 127 | 1 | 7 | 3,790 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reversal of impairment/ (impairment) | 67 | (485 | ) | 1,331 | 6 | (4 | ) | (931 | ) | — | — | (16 | ) | (37 | ) | (876 | ) | (2,174 | ) | (454 | ) | (5 | ) | (278 | ) | (1,067 | ) | — | (4,891 | ) | ||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (5 | ) | 430 | 280 | 39 | (40 | ) | — | — | — | 704 | (4 | ) | (49 | ) | (95 | ) | (13 | ) | (9 | ) | — | — | — | (170 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2015 | (59 | ) | (35,577 | ) | (68,519 | ) | (15,416 | ) | (933 | ) | (932 | ) | (3,388 | ) | (334 | ) | (125,158 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2017 | (292 | ) | (40,275 | ) | (80,872 | ) | (17,738 | ) | (797 | ) | (1,733 | ) | (4,412 | ) | (809 | ) | (146,928 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation charge | — | (3,550 | ) | (7,273 | ) | (2,253 | ) | (99 | ) | — | (180 | ) | (279 | ) | (13,634 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals | 223 | 287 | 1,593 | 1,317 | 50 | 47 | 170 | — | 3,687 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impairment | (43 | ) | (319 | ) | (1,065 | ) | (709 | ) | (15 | ) | (536 | ) | (2,153 | ) | — | (4,840 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (3 | ) | (110 | ) | (191 | ) | (28 | ) | (24 | ) | — | — | — | (356 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2018 | (115 | ) | (43,967 | ) | (87,808 | ) | (19,411 | ) | (885 | ) | (2,222 | ) | (6,575 | ) | (1,088 | ) | (162,071 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustment on initial application of IFRS16 | (556 | ) | (5 | ) | — | — | — | — | — | — | (561 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation charge | — | (3,774 | ) | (7,760 | ) | (2,613 | ) | (50 | ) | — | (133 | ) | (247 | ) | (14,577 | ) | (72 | ) | (2,919 | ) | (6,968 | ) | (3,469 | ) | (53 | ) | — | (186 | ) | (295 | ) | (13,962 | ) | |||||||||||||||||||||||||||||||||||||||
Disposals | — | 3,160 | 3,045 | 1,272 | 198 | 238 | 437 | — | 8,350 | 25 | 194 | 2,237 | 2,108 | 21 | 30 | 4,615 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Reversal of impairment/ (impairment) | (224 | ) | (260 | ) | (215 | ) | (98 | ) | — | (887 | ) | (16 | ) | — | (1,700 | ) | (36 | ) | 615 | 1,495 | (415 | ) | 10 | (310 | ) | (18 | ) | — | 1,341 | |||||||||||||||||||||||||||||||||||||||||||
Exchange differences | 32 | 546 | 550 | 86 | 52 | (1 | ) | (1 | ) | — | 1,264 | 4 | 117 | 194 | 39 | 23 | — | — | — | 377 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2016 | (251 | ) | (35,905 | ) | (72,899 | ) | (16,769 | ) | (733 | ) | (1,582 | ) | (3,101 | ) | (581 | ) | (131,821 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation charge | 0 | (3,747 | ) | (7,315 | ) | (2,222 | ) | (72 | ) | 0 | (245 | ) | (235 | ) | (13,836 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disposals | 0 | 302 | 1,611 | 1,720 | 22 | 127 | 1 | 7 | 3,790 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impairment | (37 | ) | (876 | ) | (2,174 | ) | (454 | ) | (5 | ) | (278 | ) | (1,067 | ) | 0 | (4,891 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exchange differences | (4 | ) | (49 | ) | (95 | ) | (13 | ) | (9 | ) | 0 | 0 | 0 | (170 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2017 | (292 | ) | (40,275 | ) | (80,872 | ) | (17,738 | ) | (797 | ) | (1,733 | ) | (4,412 | ) | (809 | ) | (146,928 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2019 | (750 | ) | (45,965 | ) | (90,850 | ) | (21,148 | ) | (884 | ) | (2,502 | ) | (6,779 | ) | (1,383 | ) | (170,261 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Net book value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2014 | 2,992 | 42,667 | 47,820 | 17,094 | 320 | 102,521 | 10,885 | — | 224,299 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2015 | 3,254 | 42,688 | 45,712 | 14,983 | 303 | 25,904 | 11,530 | 71,470 | 215,844 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2016 | 2,798 | 41,754 | 41,429 | 12,522 | 89 | 19,552 | 11,999 | 74,210 | 204,353 | 2,798 | 41,754 | 41,429 | 12,522 | 89 | 19,552 | 11,999 | 74,210 | 204,353 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2017 | 2,803 | 40,538 | 36,766 | 13,093 | 199 | 17,912 | 12,565 | 73,999 | 197,875 | 2,803 | 40,538 | 36,766 | 13,093 | 199 | 17,912 | 12,565 | 73,999 | 197,875 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2018 | 2,826 | 36,784 | 33,520 | 12,349 | 287 | 19,666 | 10,333 | 74,114 | 189,879 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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At December 31, 2019 | 4,748 | 38,572 | 32,657 | 16,373 | 279 | 18,974 | 10,848 | 74,541 | 196,992 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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According to the results of the impairment analysis of non-current assets, gain from reversal of impairment of RUB 1,341 million and impairment losses of RUB 4,840 million and RUB 4,891 million were recognised by the Group for the years ended December 31, 2019, 2018 and 2017, respectively (Note 17).
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
According to the results of the impairment analysis ofnon-currentProperty, plant and equipment other than right-of-use assets impairment losses of RUB 4,891 million, RUB 1,700 million and RUB 16 million were recognized by the Group
| Land | Buildings and constructions | Operating machinery and equipment | Trans- portation vehicles | Other equipment | Construction- in-progress | Mining plant and equipment | Railway Ulak-Elga | Total | ||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||
At December 31, 2018 | 2,941 | 80,751 | 119,583 | 17,203 | 1,172 | 21,888 | 16,908 | 75,202 | 335,648 | |||||||||||||||||||||||||||
Additions | — | 27 | 1,180 | 282 | 33 | 7,332 | 38 | — | 8,892 | |||||||||||||||||||||||||||
Change in rehabilitation provision | — | 456 | — | — | — | — | 707 | — | 1,163 | |||||||||||||||||||||||||||
Transfers | (9 | ) | 2,606 | 3,176 | 262 | 21 | (6,752 | ) | (26 | ) | 722 | — | ||||||||||||||||||||||||
Transfer to own property, plant and equipment | — | — | 752 | 95 | — | — | — | — | 847 | |||||||||||||||||||||||||||
Disposals | (24 | ) | (240 | ) | (2,400 | ) | (2,045 | ) | (33 | ) | (990 | ) | — | — | (5,732 | ) | ||||||||||||||||||||
Exchange differences | (84 | ) | (263 | ) | (223 | ) | (29 | ) | (30 | ) | (2 | ) | — | — | (631 | ) | ||||||||||||||||||||
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At December 31, 2019 | 2,824 | 83,337 | 122,068 | 15,768 | 1,163 | 21,476 | 17,627 | 75,924 | 340,187 | |||||||||||||||||||||||||||
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Depreciation and impairment | ||||||||||||||||||||||||||||||||||||
At December 31, 2018 | (115 | ) | (43,967 | ) | (86,706 | ) | (14,323 | ) | (885 | ) | (2,222 | ) | (6,575 | ) | (1,088 | ) | (155,881 | ) | ||||||||||||||||||
Depreciation charge | — | (2,781 | ) | (6,764 | ) | (882 | ) | (53 | ) | — | (186 | ) | (295 | ) | (10,961 | ) | ||||||||||||||||||||
Transfer to own property, plant and equipment | — | — | (638 | ) | (94 | ) | — | — | — | — | (732 | ) | ||||||||||||||||||||||||
Disposals | 22 | 193 | 2,228 | 1,996 | 21 | 30 | 4,490 | |||||||||||||||||||||||||||||
Reversal of impairment/ (impairment) | 36 | 615 | 1,514 | (52 | ) | 10 | (310 | ) | (18 | ) | — | 1,795 | ||||||||||||||||||||||||
Exchange differences | 3 | 114 | 192 | 34 | 23 | — | — | — | 366 | |||||||||||||||||||||||||||
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At December 31, 2019 | (54 | ) | (45,826 | ) | (90,174 | ) | (13,321 | ) | (884 | ) | (2,502 | ) | (6,779 | ) | (1,383 | ) | (160,923 | ) | ||||||||||||||||||
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Net book value | ||||||||||||||||||||||||||||||||||||
At December 31, 2018 | 2,826 | 36,784 | 32,877 | 2,880 | 287 | 19,666 | 10,333 | 74,114 | 179,767 | |||||||||||||||||||||||||||
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At December 31, 2019 | 2,770 | 37,511 | 31,894 | 2,447 | 279 | 18,974 | 10,848 | 74,541 | 179,264 | |||||||||||||||||||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the yearsyear ended December 31, 2017, 2016 and 2015, respectively (Note 18).2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Assets under construction
As of December 31, 20172019 and 2016,2018, construction-in-progress included advances issued for acquisition of property, plant and equipment in the amounts of RUB 342277 million and RUB 430547 million, respectively.
Property pledged to the banks as security
Certain property, plant and equipment assets have been pledged to secure bank loans and borrowings granted to the Group:
| December 31, 2017 | December 31, 2016 | |||||||
Net book value | 121,926 | 117,047 | ||||||
Finance leases
The Group leases operating machinery and equipment and transportation vehicles under a number of finance lease agreements. At the end of the term of the lease, the Group obtains ownership of the assets or has an option to purchase leased assets at a bargain price.
| December 31, 2017 | December 31, 2016 | |||||||
Net book value — operating machinery and equipment | 1,516 | 2,825 | ||||||
Net book value — transportation vehicles | 9,690 | 9,265 | ||||||
Additions of operating machinery and equipment and transportation vehicles under finance lease during the year ended December 31, 2017 amounted to RUB 2,295 million (2016: RUB 386 million).
| December 31, 2019 | December 31, 2018 | |||||||
Net book value | 116,717 | 117,370 | ||||||
Capitalised borrowing costs
The amount of borrowing costs capitalised during the year ended December 31, 20172019 was RUB 621309 million (2016:(2018: RUB 1,015492 million, 2015:2017: RUB 1,954621 million). The rate used to determine the amount of borrowing costs eligible for capitalisation was 9.70% (2016: 10.28%8.57% (2018: 8.55%, 2015: 15.022017: 9.70 %), which is the average rate of the eligible borrowings.
Contractual commitments
As of December 31, 2019 and 2018, the total Group’s contractual commitments to acquire property, plant and equipment excluding VAT amounted to RUB 10,506 million and RUB 11,801 million, respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Intangible assets |
| Goodwill | Mineral licenses | Other intangible assets | ||||||||||
Cost | ||||||||||||
At December 31, 2014 | 32,958 | 55,712 | — | |||||||||
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| |||||||
Additions | — | 71 | — | |||||||||
Disposal | (88 | ) | — | — | ||||||||
Exchange differences | 125 | — | — | |||||||||
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At December 31, 2015 | 32,995 | 55,783 | — | |||||||||
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| |||||||
Additions | — | — | — | |||||||||
Disposal | — | — | — | |||||||||
Exchange differences | (93 | ) | — | — | ||||||||
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| |||||||
At December 31, 2016 | 32,902 | 55,783 | — | |||||||||
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| |||||||
Additions | 0 | 0 | 880 | |||||||||
Disposal | 0 | (165 | ) | 0 | ||||||||
Exchange differences | (24 | ) | 0 | 0 | ||||||||
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| |||||||
At December 31, 2017 | 32,878 | 55,618 | 880 | |||||||||
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Depletion, amortisation and impairment | ||||||||||||
At December 31, 2014 | (10,261 | ) | (15,590 | ) | — | |||||||
|
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| |||||||
Impairment | (1,444 | ) | — | — | ||||||||
Depletion and amortisation | — | (1,676 | ) | — | ||||||||
Disposal | 88 | — | — | |||||||||
Exchange differences | — | — | — | |||||||||
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| |||||||
At December 31, 2015 | (11,617 | ) | (17,266 | ) | — | |||||||
|
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| |||||||
Impairment | (2,930 | ) | (572 | ) | — | |||||||
Depletion and amortisation | — | (1,846 | ) | — | ||||||||
Disposal | — | — | — | |||||||||
Exchange differences | — | — | ||||||||||
|
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| |||||||
At December 31, 2016 | (14,547 | ) | (19,684 | ) | — | |||||||
|
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| |||||||
Impairment | 0 | (1,190 | ) | 0 | ||||||||
Depletion and amortisation | 0 | (1,504 | ) | 0 | ||||||||
Disposal | 0 | 0 | 0 | |||||||||
Exchange differences | 0 | 0 | 0 | |||||||||
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| |||||||
At December 31, 2017 | (14,547 | ) | (22,378 | ) | 0 | |||||||
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| |||||||
Net book value | ||||||||||||
At December 31, 2014 | 22,697 | 40,122 | — | |||||||||
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| |||||||
At December 31, 2015 | 21,378 | 38,517 | — | |||||||||
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| |||||||
At December 31, 2016 | 18,355 | 36,099 | — | |||||||||
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| |||||||
At December 31, 2017 | 18,331 | 33,240 | 880 | |||||||||
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| |||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Mineral licenses relate to coal mines and were recorded upon acquisition of mining subsidiaries. The carrying values of the mineral licenses were reduced proportionate to the depletion of the respective mineral reserves at each deposit related to mining and production of reserves adjusted for the reservesre-measurement and purchase accounting effects. Reduction in carrying values of the mineral licenses is included in the depletion charge for the period within the Cost of sales in the consolidated statement of profit (loss) and other comprehensive income (loss). No residual value is assumed in the mineral license valuation.
To determine the value of the mineral licenses as of December 31, 2017, the Group used quantities of underlying mineral assets, production data and other factors, including economic viability and any new exploration data.
The Group’s mining segment production activities are located within Russia. The Group’s mineral reserves and deposits are situated on the land belonging to government and regional authorities. Mining minerals require a subsoil license from the state authorities with respect to identified mineral deposits. The Group obtains licenses from such authorities and pays certain taxes to explore and produce from these deposits. These licenses expire up to 2037, with the most significant licenses expiring between 2020 and 2025, and management believes that they may be extended at the initiative of the Group without substantial cost. Management intends to extend such licenses for deposits expected to remain productive subsequent to their license expiry dates.
| Goodwill | Mineral licenses | Other intangible assets | ||||||||||
Cost | ||||||||||||
At December 31, 2016 | 32,902 | 55,783 | — | |||||||||
Additions | — | — | 880 | |||||||||
Disposal | — | (165 | ) | — | ||||||||
Exchange differences | (24 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
At December 31, 2017 | 32,878 | 55,618 | 880 | |||||||||
Additions | — | — | — | |||||||||
Disposal | — | — | — | |||||||||
Exchange differences | 90 | — | — | |||||||||
|
|
|
|
|
| |||||||
At December 31, 2018 | 32,968 | 55,618 | 880 | |||||||||
Additions | ||||||||||||
Disposal | ||||||||||||
Exchange differences | (57 | ) | ||||||||||
|
|
|
|
|
| |||||||
At December 31, 2019 | 32,911 | 55,618 | 880 | |||||||||
|
|
|
|
|
| |||||||
Amortisation and impairment | ||||||||||||
At December 31, 2016 | (14,547 | ) | (19,684 | ) | — | |||||||
Impairment | — | (1,190 | ) | — | ||||||||
Amortisation | — | (1,504 | ) | — | ||||||||
|
|
|
|
|
| |||||||
At December 31, 2017 | (14,547 | ) | (22,378 | ) | — | |||||||
Impairment | (2,382 | ) | — | — | ||||||||
Amortisation | — | (1,172 | ) | (36 | ) | |||||||
Disposal | — | — | — | |||||||||
Exchange differences | — | — | — | |||||||||
|
|
|
|
|
| |||||||
At December 31, 2018 | (16,929 | ) | (23,550 | ) | (36 | ) | ||||||
Impairment | (3,139 | ) | (6 | ) | — | |||||||
Amortisation | — | (987 | ) | (35 | ) | |||||||
Disposal | — | — | — | |||||||||
Exchange differences | — | — | — | |||||||||
|
|
|
|
|
| |||||||
At December 31, 2019 | (20,068 | ) | (24,543 | ) | (71 | ) | ||||||
|
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| |||||||
Net book value | ||||||||||||
At December 31, 2016 | 18,355 | 36,099 | — | |||||||||
|
|
|
|
|
| |||||||
At December 31, 2017 | 18,331 | 33,240 | 880 | |||||||||
|
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|
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| |||||||
At December 31, 2018 | 16,039 | 32,068 | 844 | |||||||||
|
|
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| |||||||
At December 31, 2019 | 12,843 | 31,075 | 809 | |||||||||
|
|
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| |||||||
In December 2017, the Group acquired the rights to connect to the power grid for providing the SKCC’s power receiving equipment with an additional power capacity. These rights are recorded as other intangible assets of mining segment with a useful life of 25 years.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
As of December 31, 20172019 and 2016,2018, the Group performed an impairment analysis of goodwill (Note 18)17).
As of December 31, 2019 and 2018, the total Group’s contractual commitments to acquire intangible assets excluding VAT amounted to nil and RUB 110 million, respectively.
Impairment of goodwill and othernon-current assets |
As of December 31, 20172019 and 2016,2018, the Group performed an impairment analysis of goodwill and othernon-current assets at the level of cash generating units (CGU). The Group considers the relationship between market capitalization and its book value, among other factors, when reviewing for indicators of impairment. Goodwill acquired through business combinations has been allocated to CGUs for impairment testing as follows (before impairment write-downs):
| Goodwill | ||||||||||
Cash generating units | Segment | December 31, 2017 | December 31, 2016 | |||||||
Yakutugol | Mining | 13,399 | 13,399 | |||||||
Southern Kuzbass Power Plant | Power | 2,382 | 2,382 | |||||||
Kuzbass Power Sales Company | Power | 1,026 | 1,026 | |||||||
Port Posiet | Mining | 756 | 756 | |||||||
Chelyabinsk Metallurgical Plant | Steel | 556 | 580 | |||||||
Southern Kuzbass Coal Company | Mining | 143 | 143 | |||||||
Port Temryuk | Mining | 69 | 69 | |||||||
Bratsk Ferroalloy Plant | Steel | 0 | 2,930 | |||||||
|
|
|
| |||||||
Total | 18,331 | 21,285 | ||||||||
|
|
|
| |||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Goodwill | ||||||||||||
Cash generating units | Segment | December 31, 2019 | December 31, 2018 | |||||||||
Yakutugol | Mining | 13,399 | 13,399 | |||||||||
Kuzbass Power Sales Company | Power | 1,026 | 1,026 | |||||||||
Port Posiet | Mining | 756 | 756 | |||||||||
Chelyabinsk Metallurgical Plant | Steel | 589 | 646 | |||||||||
Southern Kuzbass Coal Company | Mining | 143 | 143 | |||||||||
Port Temryuk | Mining | 69 | 69 | |||||||||
Southern Kuzbass Power Plant | Power | — | 2,382 | |||||||||
|
|
|
| |||||||||
Total | 15,982 | 18,421 | ||||||||||
|
|
|
| |||||||||
As of December 31, 20172019 and 2016,2018, the recoverable amount of CGUs was determined based on value in use. The material assumptions that driveuse except for one CGU with the recoverable amount determined as fair value in use are represented by projected prices, sales volumes, operating costs, terminal growth rates and discount rates. Some of these assumptions materially deviate from the Group’s historical results primarily dueless cost to the market downturns and economic slowdowns in the recent years in Russia. All these material assumptions are based on the Group’s projections and are subject to risk and uncertainty.
The forecasted period fornon-mining subsidiaries of the Group was assumed to be five years to reach stabilized cash flows. As of December 31, 2017, the value beyond the forecasted period was based on the terminal growth rates of2%-4%. For mining subsidiaries of the Group the forecasted period was based on the remaining life of the mines.
Discount rates used in the impairment test for goodwill andnon-current assets were estimated in nominal terms on the weighted average cost of capital basis.sell. Inflation and discount rates, range of discount rates, estimated for each year for the forecasted period, were as follows:
| Forecast period, years | ||||||||||
For the year ended December 31, 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |||||
Inflation rate in Russia | 5.1% | 4.0% | 4.0% | 4.0% | 4.0% | |||||
Inflation rate in Europeans countries | 3.3% | 3.1% | 3.1% | 3.1% | 3.0% | |||||
Discount rate, % | 8.9%-19.0% | 8.9%-19.0% | 8.9%-19.0% | 8.9%-19.0% | 8.9%-19.0% | |||||
For the year ended December 31, 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | |||||
Inflation rate in Russia | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | |||||
Inflation rate in Europeans countries | 2.9% | 2.9% | 2.9% | 2.8% | 2.8% | |||||
Discount rate, % | 9.19%-17.72% | 9.19%-17.72% | 9.19%-17.72% | 9.19%-17.72% | 9.19%-17.72% | |||||
| Forecast period, years | ||||||||||
For the year ended December 31, 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |||||
Inflation rate in Russia | 5.0% | 4.3% | 3.8% | 4.0% | 4.0% | |||||
Inflation rate in European countries | 3.3% | 3.3% | 3.1% | 3.1% | 3.0% | |||||
Pre-tax discount rate, % | 11.10%-23.60% | 11.10%-23.60% | 11.10%-23.60% | 11.10%-23.60% | 11.10%-23.60% | |||||
For the year ended December 31, 2019 | 2020 | 2021 | 2022 | 2023 | 2024 | |||||
Inflation rate in Russia | 3.7% | 3.4% | 3.8% | 3.8% | 3.8% | |||||
Inflation rate in European countries | 3.1% | 2.7% | 2.8% | 2.8% | 2.9% | |||||
Pre-tax discount rate, % | 10.0%-14.9% | 10.0%-14.9% | 10.0%-14.9% | 10.0%-14.9% | 10.0%-14.9% | |||||
ForAs of December 31, 2019, the Group performed the impairment testing for the following number of CGUs which cash flows relate to mineral assets, future cash flows include estimatesby segments: Steel – 3, Mining – 6 and Power – 2.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of recoverable minerals that will be obtained from proved and probable reserves, mineral prices (considering current and historical prices, price trends and other related factors), production levels, capital and reclamation costs, all based on the life of mine models prepared by the Group’s engineers. The Group believes that the values assigned to key assumptions and estimates represent the most realistic assessment of future trends.Russian rubles, unless stated otherwise)
Impairment of goodwill
According to the results of the impairment analysis of goodwill, no impairment loss as of December 31, 2017 was recognized.
According to the results of the impairment analysis of goodwill, an impairment loss as of December 31, 20162019 was recognizedrecognised in the following CGU:
Cash generating units | Impairment loss on goodwill at December 31, | |||
| ||||
|
| |||
Total | ||||
|
| |||
Goodwill at Yakutugol was impaired in the amount of RUB 3,139 as of December 31, 2019 due to coal prices decline in long-term forecast along with forthcoming depletion of Neryungrinsky Open Pit. The remaining carrying value of goodwill was RUB 10,259 million.
According to the results of the impairment analysis of goodwill, an impairment loss as of December 31, 2018 was recognised in the following CGU:
Cash generating units | Impairment loss on goodwill at December 31, 2018 | |||
Southern Kuzbass Power Plant (SKPP) | 2,382 | |||
Total | 2,382 | |||
Goodwill at SKPP was written down from RUB 2,382 million to nil as of December 31, 2018 due to the breakdown of generating equipment and increased raw materials cost, that led to the increased idle and maintenance costs and reduced generating capacity forecasts.
According to the results of the impairment analysis of goodwill, no impairment loss as of December 31, 2017 was recognized.
Impairment of non-current assets
According to the results of the impairment analysis, impairment of non-current assets was identified for the following CGUs as of December 31, 2019:
Cash generating units | Impairment loss on non-current assets identified as a result of impairment tests at December 31, 2019 | |||
Bratsk Ferroalloy Plant (BFP) | 727 | |||
Korshunov Mining Plant (KMP) | 549 | |||
Total | 1,276 | |||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Impairment of goodwillnon-current assets at BFP of RUB 727 million was recognizedrecognised due to ferrosilicon prices decline in long-term forecast. The remaining carrying value of the changesproperty, plant and equipment and mineral licenses of BFP was RUB 702 million. Estimated future cash flows remained negative at KMP therefore property, plant and equipment acquired in expectations2019 for the purpose to maintain production volumes in accordance with the license agreement obligations was written down to nil as of long-termDecember 31, 2019.
According to the results of the impairment analysis, reversal of previously recognised impairment loss of non-current assets was identified for the following CGUs as of December 31, 2019:
Cash generating units | Gain from reversal of previously recognised impairment loss on non-current assets at December 31, 2019 | |||
Izhstal | 2,611 | |||
Total | 2,611 | |||
An impairment loss of non-current assets previously recognised at Izhstal was reversed of RUB 2,611 million due to decline in purchase prices for ferrosiliconelectrodes used as raw materials for steel production in a long-term forecast and decrease in forecasted production volumes accompanied bypre-tax discount rate The remaining carrying value of the increased forecasted costs.
Impairmentproperty, plant and equipment ofnon-current assets Izhstal was RUB 4,199 million.
According to the results of the impairment analysis, impairment ofnon-current assets was identified for the following CGUs as of December 31, 2018:
Cash generating units | Impairment loss on non-current assets identified as a result of impairment tests at December 31, 2018 | |||
Korshunov Mining Plant (KMP) | 1,151 | |||
Izhstal | 781 | |||
Southern Kuzbass Power Plant (SKPP) | 337 | |||
Total | 2,269 | |||
The carrying value of property, plant and equipment at KMP was written down to nil as of December 31, 2017. However, during 2018, new non-current assets were acquired for the purpose to maintain production volumes in accordance with the license agreement obligations. As of December 31, 2018, estimated future cash flows remain negative due to high transportation cost per tonne and significant costs of large-scale stripping works in order to fulfil required level of extraction. Therefore, an additional impairment of property, plant and equipment at KMP of RUB 1,151 million was recognised as of December 31, 2018.
Impairment of property, plant and equipment at Izhstal of RUB 781 million was caused by the shift of production technology to casting own steel instead of acquiring billets, increased projected cost of purchased scrap metal and continued growth in long-term production costs. The remaining carrying value of the property, plant and equipment of Izhstal was RUB 1,799 million.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Impairment of non-current assets at SKPP of RUB 337 million represents the remaining loss allocated after the reduction of carrying value of goodwill at SKPP as described above. The remaining carrying value of the property, plant and equipment of SKPP was RUB 1,889 million.
Carrying value of individual items of the non-current assets for the respective entities including the underground mining workings at SKCC was impaired due to changes in the Group’s management plans to invest funds into the ongoing construction projects and, as a result, the inability of these assets to generate future economic benefits in the current market conditions:
Subsidiaries | Impairment loss on non-current assets identified for individual items of assets at December 31, 2018 | |||
Southern Kuzbass Coal Company (SKCC) | 2,533 | |||
Other | 38 | |||
Total | 2,571 | |||
According to the results of the impairment analysis, impairment of non-current assets was identified for the following CGUs as of December 31, 2017:
Cash generating units | Impairment loss onnon-current assetsidentified as impairment tests at December 31, 2017 | |||
Korshunov Mining Plant (KMP) | 2,271 | |||
Izhstal | 2,130 | |||
Bratsk Ferroalloy Plant (BFP) | 151 | |||
|
| |||
Total | 4,552 | |||
|
| |||
The carrying value of property, plant and equipment and the mineral licenses at KMP of RUB 1,631 million and RUB 640 million, respectively, was written down to nil as of December 31, 2017 due to the decline in long-term forecast for iron ore prices, increase in transportation cost per tonne and growth of stripping costs required for removal of landslide deformations. Impairment ofnon-current assets at Izhstal of RUB 2,130 million was caused by significant increase in production costs for raw materials, specifically by increase in purchase price for electrodes expected to be maintained for a long-term period. The remaining carrying value of the property, plant and equipment of Izhstal was 2,871 RUB million. Impairment of property, plant and equipment at BFP of RUB 151 million was recognized due to the extension of planned period of furnace shutdown for compulsory repair works. The remaining carrying value of the property, plant and equipment and mineral licenses of BFP was RUB 1,258 million.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The carrying value of individual items of thenon-current assets for the respective entity was impaired due to the decline by the regulatory authorities to extend the term of mineral license for exploration and extraction:
Subsidiaries | Impairment loss onnon-current assetsidentified for individual items of assets at December 31, 2017 | |||
Southern Kuzbass Coal Company (SKCC) | 1,529 | |||
|
| |||
Total | 1,529 | |||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
According to the results of the impairment analysis, impairment ofnon-current assets was identified for the following CGUs as of December 31, 2016:
| ||||
| ||||
| ||||
| ||||
The carrying value of individual items of the assets for the respective entities was impaired due to inability to generate economic benefits:
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| ||||
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Sensitivity analysis
Reasonably possible change in key assumptions used in calculations of value in use could impact recoverable amount which was most sensitive to the growth of discount rate, cash flows growth rates after the forecasted period and change in operating profit due to changes in sales and extraction volumes sales prices and costs.selling prices.
Based on the sensitivity analysis carried out as of December 31, 2017,2019, a 5% decrease in future planned revenues would trigger impairment of goodwill, property, plant and equipment, mineral licenses and other intangible assets of RUB 2,27917,693 million at Southern Kuzbass Power Plant,SKCC, additional impairment of goodwill of RUB 8,283 million at Yakutugol, additional impairment of property, plant and equipment and mineral licenses at BFP of 702 RUB 1,258 million, and a 1% increase in discount rate would lead to additional impairment of property, plant and equipmentgoodwill of RUB 2,6511,606 million at Izhstal.Yakutugol. Decrease in selling prices for steel products by 3.3% would lead to reduction of gain from reversal of previously recognised impairment loss at Izhstal, at a 5.5% decrease in selling prices for steel products gain from reversal of previously recognized impairment loss at Izhstal would decrease to nil.
For the cash-generating units, which were not impaired in the reporting period and for which the reasonably possible changes could lead to impairment, the recoverable amounts would become equal to their carrying amounts if the assumptions used to measure the recoverable amounts changed by the following percentages: increase in discount rate by 1% or decrease in sales prices by 2.8%1.3% and 2.5% at Elga coal deposit, decrease in sales prices by 0.9% at Southern Kuzbass Power PlantSKCC and decrease in growth rate by 1.3% at Southern Kuzbass Power Plant.SKPP, respectively. The recoverable amounts of Elga coal depositSKCC and Southern Kuzbass Power PlantSKPP based on initial key assumptions exceed the carrying amounts by RUB 33,5586,436 million and RUB 4731,390 million, respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Reasonably possible changes in other key assumptions used in assessing recoverable amount of CGUs as of December 31, 20172019 do not lead to excess of carrying value over recoverable amount.
Based on the sensitivity analysis carried out as of December 31, 2016, a 5% decrease in future planned revenues would trigger impairment of goodwill of RUB 1,026 million, property, plant and equipment of RUB 644 million at KPSC, additional impairment of property, plant and equipment at BFP of RUB 1,363 million and impairment of property, plant and equipment of RUB 1,996 million at Izhstal.
Trade and other payables |
| December 31, 2017 | December 31, 2016 | |||||||
Trade payables | 18,999 | 21,335 | ||||||
Other payables | 14,470 | 19,650 | ||||||
|
|
|
| |||||
Total trade and other payables | 33,469 | 40,985 | ||||||
|
|
|
| |||||
Trade payables Other payables Total trade and other payables Other payables include accruals for breach of contracts, payables for property, plant and equipment acquired, salaries payable, dividends payable and other. December 31,
2019 December 31,
2018 27,806 24,288 10,585 10,512 38,391 34,800
| December 31, 2017 | December 31, 2016 | |||||||
Other payables | ||||||||
Accounts payable for fixed assets | 2,774 | 2,964 | ||||||
Salaries payable | 1,504 | 1,475 | ||||||
Accruals for breach of contract terms | 176 | 745 | ||||||
Dividends payable, common shares | 152 | — | ||||||
Dividends payable, preferred shares | 86 | — | ||||||
Other | 9,778 | 14,466 | ||||||
|
|
|
| |||||
Total | 14,470 | 19,650 | ||||||
|
|
|
| |||||
The balance of other payables includes payables for the acquisition of DEMP of RUB 4,010 million and RUB 8,032 million as of December 31, 2017 and 2016, respectively.
The major components of income tax (expense) benefit for the years ended December 31, 2017, 2016 and 2015 are:
Recognised in profit or loss | 2017 | 2016 | 2015 | |||||||||
Current income tax | ||||||||||||
Current income tax charge | (3,397 | ) | (555 | ) | (361 | ) | ||||||
Adjustments in respect of income tax, including income tax penalties and changes in uncertain income tax position | (3,154 | ) | 766 | (15 | ) | |||||||
Deferred tax | ||||||||||||
Relating to origination and reversal of temporary differences | 3,401 | (5,104 | ) | (7,946 | ) | |||||||
|
|
|
|
|
| |||||||
Income tax expense reported in the consolidated statement of profit (loss) and other comprehensive income (loss) | (3,150 | ) | (4,893 | ) | (8,322 | ) | ||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Other payables include accruals for fines and penalties, payables for property, plant and equipment acquired, salaries payable, dividends payable and other.
| December 31, 2019 | December 31, 2018 | |||||||
Other payables | ||||||||
Wages and salaries payable and other related obligations | 3,538 | 3,425 | ||||||
Accounts payable for property, plant and equipment | 3,164 | 2,600 | ||||||
Dividends payable, common shares | 136 | 146 | ||||||
Dividends payable, preferred shares | 80 | 86 | ||||||
Other | 3,667 | 4,255 | ||||||
|
|
|
| |||||
Total | 10,585 | 10,512 | ||||||
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| 19. | Income tax |
The major components of income tax expense for the years ended December 31, 2019, 2018 and 2017 are:
Recognised in profit or loss | 2019 | 2018 | 2017 | |||||||||
Current income tax | ||||||||||||
Current income tax charge | (2,981 | ) | (2,315 | ) | (3,397 | ) | ||||||
Adjustments in respect of income tax, including income tax penalties and changes in uncertain income tax position | (2,718 | ) | (2,962 | ) | (3,154 | ) | ||||||
Deferred tax | ||||||||||||
Relating to origination and reversal of temporary differences | (2,288 | ) | 2,596 | 3,401 | ||||||||
|
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Income tax expense reported in the consolidated statement of profit (loss) and other comprehensive income | (7,987 | ) | (2,681 | ) | (3,150 | ) | ||||||
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In January 2013, the Group created the consolidated group of taxpayers in accordance with the Tax code of the Russian Federation, under the Federal law of the Russian Federation of November 16, 2011 No.321-FZ. The existence of the consolidated group of taxpayers is subject to compliance with several conditions stated in the Tax code of the Russian Federation. The Group believes that these conditions were met as of December 31, 20172019, 2018 and 2016.2017. In 2015-2017,2016-2019, the consolidated group of taxpayers consisted of 20 subsidiaries of the Group, together with Mechel PAO, which is the responsible taxpayer under the agreement. On October 2, 2017, an Additional Agreement was signedUnder the Federal law of the Russian Federation of August 3, 2018 No. 302-FZ, the Russian legislation introduced a limitation for registration by the tax authorities of agreements on the establishment of consolidated group of taxpayers, changes to extendcontracts related to the termaccession of new members of such groups, withdrawal of participants, the extension of the agreement on the established consolidated group of taxpayers and termination of the consolidated group of taxpayers contract for an indefinite period.by January 1, 2023.
For subsidiaries which are not included in the consolidated group of taxpayers, income taxes are calculated on an individual subsidiary basis. Deferred income tax assets and liabilities are recognised in the accompanying consolidated financial statements in the amount determined by the Group in accordance with IAS 1212.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
Income Taxes(All amounts are in millions of Russian rubles, unless stated otherwise).
During 2015-2017,2017-2019, income tax was calculated at 20% of taxable profit in Russia at10.5%-11% in Switzerland, at 16% in Romania, at 15% in Lithuania, at 20% inand Kazakhstan, and at 18%25% in Ukraine. The Group’s subsidiaries incorporatedAustria. Income tax in British Virgin Islands are exempt from profit tax.Germany was calculated at 32.81%, 32.10% and 32.10% for 2017, 2018 and 2019. Amendments in the tax legislation of the United KingdomSwitzerland resulted in the decreaseincrease in tax rate from 20%10.5%-11% to 13% since AprilJanuary 1, 20152020.
Starting 2018, Elgaugol used a privilege and applied a 0% income tax rate due to 19% since April 1, 2017.fulfillment of conditions of the Regional investment project (RIP).
The reconciliation between the income tax (expense) benefitexpense computed by applying the Russian enacted statutory tax rates to the income from continuing operations before tax andnon-controlling interest, to the income tax (expense) benefitexpense reported in the consolidated financial statements is as follows:
| 2017 | 2016 | 2015 | ||||||||||
Profit (loss) before tax from continuing operations | 15,720 | 14,151 | (107,128 | ) | ||||||||
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Income tax (expense) benefit at statutory income tax rate of 20% | (3,144 | ) | (2,830 | ) | 21,426 | |||||||
Adjustments: | ||||||||||||
Adjustments in respect of income tax, including income tax penalties and changes in uncertain income tax position. | (3,154 | ) | 766 | (15 | ) | |||||||
Unrecognized current year tax losses andwrite-off of previously recognized asset on tax losses | 4,783 | 513 | (19,822 | ) | ||||||||
Non-deductible expenses for tax purposes | (1,755 | ) | (1,317 | ) | (4,341 | ) | ||||||
Non-deductible interest expense | (254 | ) | (1,055 | ) | (2,588 | ) | ||||||
Effect ofnon-deductible penalties on breach of covenants in credit agreements | 112 | (1,152 | ) | (3,025 | ) | |||||||
Effect of different tax rates in foreign jurisdictions | 262 | 182 | 26 | |||||||||
Effect of the disposal of subsidiaries | 0 | — | 17 | |||||||||
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At the effective income tax rate of 20,0% (34.6% in 2016, 7.8% in 2015) income tax expense reported in the consolidated statement of profit (loss) and other comprehensive income (loss) | (3,150 | ) | (4,893 | ) | (8,322 | ) | ||||||
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| 2019 | 2018 | 2017 | ||||||||||
Profit before tax from continuing operations | 12,272 | 16,217 | 15,720 | |||||||||
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Income tax expense at statutory income tax rate of 20% | (2,454 | ) | (3,243 | ) | (3,144 | ) | ||||||
Adjustments: | ||||||||||||
Adjustments in respect of income tax, including income tax penalties and changes in uncertain income tax position. | (2,718 | ) | (2,962 | ) | (3,154 | ) | ||||||
Unrecognised current year tax losses and write-off of previously recognised asset on tax losses | (1,277 | ) | 4,008 | 4,783 | ||||||||
Non-deductible expenses for tax purposes | (1,347 | ) | (3,625 | ) | (1,755 | ) | ||||||
Non-deductible interest expense | (229 | ) | (363 | ) | (254 | ) | ||||||
Effect of restructuring and expense related to fines and penalties on breach of covenants in credit agreements | — | 3,460 | 112 | |||||||||
Effect of different tax rates | 155 | (12 | ) | 262 | ||||||||
Change in tax rate | (117 | ) | 56 | — | ||||||||
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At the effective income tax rate of 65.1% (16.5% in 2018, 20.0% in 2017) income tax expense reported in the consolidated statement of profit (loss) and other comprehensive income | (7,987 | ) | (2,681 | ) | (3,150 | ) | ||||||
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The deferred tax balances were calculated by applying the currently enacted statutory income tax rate in each jurisdiction applicable to the period in which the temporary differences between the carrying amounts and tax base (both in respective local currencies) of assets and liabilities are expected to reverse.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
On January 9, 2014, the Group failed to sustain its position in the court with respect to the income tax claims in the amount of RUB 3,977 million, including penalties and fines. The schedule of payments was agreed with the tax authorities for the period till May 2017. During 2016, the Group did not meet this schedule of payments and a new payment schedule agreed with the tax authorities was signed in December 2016. As of December 31, 2016, the outstanding amount payable was RUB 2,160 million (not overdue) including long-term part RUB 540 million. As of December 31, 2017, the outstanding amount payable was RUB 540 million (not overdue).
The amounts reported in the accompanying consolidated financial statements consisted of the following:
| January 1, 2015 | Tax (expense) benefit during the period recognised in profit or loss | Disposals of subsidiaries | Foreign currency translation effect | December 31, 2015 | January 1, 2019 | Adjustment on initial application of IFRS 16 | January 1, 2019 adjusted for the effect of IFRS 16 | Tax (expense) benefit during the period recognised in profit or loss | Foreign currency translation effect | December 31, 2019 | ||||||||||||||||||||||||||||||||||
Deferred tax assets | ||||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | 820 | 265 | (30 | ) | — | 1,055 | 386 | (86 | ) | 300 | 386 | — | 686 | |||||||||||||||||||||||||||||||
Rehabilitation provision | 223 | 288 | — | (1 | ) | 510 | 773 | — | 773 | 295 | — | 1,068 | ||||||||||||||||||||||||||||||||
Inventory | 125 | (48 | ) | — | (4 | ) | 73 | 1,716 | — | 1,716 | (36 | ) | (1 | ) | 1,679 | |||||||||||||||||||||||||||||
Accounts receivable | 190 | 79 | — | (11 | ) | 258 | ||||||||||||||||||||||||||||||||||||||
Bad debt allowance | 758 | 50 | (2 | ) | 48 | 854 | ||||||||||||||||||||||||||||||||||||||
Loans & borrowings | 3,428 | (3,205 | ) | — | 1 | 224 | ||||||||||||||||||||||||||||||||||||||
Finance lease liabilities | 1,639 | (133 | ) | — | 2 | 1,508 | ||||||||||||||||||||||||||||||||||||||
Accounts payable and other liabilities | 1,041 | (279 | ) | — | 1 | 763 | ||||||||||||||||||||||||||||||||||||||
Trade and other receivables | 790 | — | 790 | (269 | ) | (2 | ) | 519 | ||||||||||||||||||||||||||||||||||||
Loans and borrowings | 320 | — | 320 | 40 | — | 360 | ||||||||||||||||||||||||||||||||||||||
Lease liabilities | 843 | 651 | 1,494 | 1,087 | (4 | ) | 2,577 | |||||||||||||||||||||||||||||||||||||
Trade and other payables and other liabilities | 869 | — | 869 | (340 | ) | — | 529 | |||||||||||||||||||||||||||||||||||||
Net operating loss carry-forwards | 16,861 | (6,258 | ) | 3 | 5 | 10,611 | 13,623 | — | 13,623 | (3,210 | ) | (10 | ) | 10,403 | ||||||||||||||||||||||||||||||
Other | 328 | (4 | ) | — | — | 324 | 74 | — | 74 | 40 | (3 | ) | 111 | |||||||||||||||||||||||||||||||
Deferred tax liabilities | ||||||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | (16,480 | ) | 308 | — | (27 | ) | (16,199 | ) | (15,468 | ) | (537 | ) | (16,005 | ) | (1,830 | ) | 30 | (17,805 | ) | |||||||||||||||||||||||||
Mineral licenses | (8,020 | ) | 319 | — | — | (7,701 | ) | (6,376 | ) | — | (6,376 | ) | 235 | — | (6,141 | ) | ||||||||||||||||||||||||||||
Rehabilitation provision | (27 | ) | 19 | — | — | (8 | ) | |||||||||||||||||||||||||||||||||||||
Inventory | (970 | ) | 372 | — | (6 | ) | (604 | ) | (834 | ) | — | (834 | ) | (160 | ) | 5 | (989 | ) | ||||||||||||||||||||||||||
Accounts receivable | (109 | ) | 62 | — | — | (47 | ) | |||||||||||||||||||||||||||||||||||||
Bad debt allowance | (177 | ) | — | — | — | (177 | ) | |||||||||||||||||||||||||||||||||||||
Loans & borrowings | (604 | ) | 151 | — | (1 | ) | (454 | ) | ||||||||||||||||||||||||||||||||||||
Accounts payable and other liabilities | (78 | ) | (35 | ) | — | — | (113 | ) | ||||||||||||||||||||||||||||||||||||
Other | (563 | ) | 103 | — | (15 | ) | (475 | ) | ||||||||||||||||||||||||||||||||||||
Trade and other receivables | (499 | ) | — | (499 | ) | (280 | ) | 5 | (774 | ) | ||||||||||||||||||||||||||||||||||
Loans and borrowings | (3,898 | ) | — | (3,898 | ) | 1,825 | — | (2,073 | ) | |||||||||||||||||||||||||||||||||||
Trade and other payables and other liabilities | (337 | ) | — | (337 | ) | (71 | ) | 29 | (379 | ) | ||||||||||||||||||||||||||||||||||
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Deferred tax assets (liabilities), net | (1,615 | ) | (7,946 | ) | (29 | ) | (8 | ) | (9,598 | ) | (8,018 | ) | 28 | (7,990 | ) | (2,288 | ) | 49 | (10,229 | ) | ||||||||||||||||||||||||
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MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| January 1, 2016 | Tax (expense) benefit during the period recognised in profit or loss | Foreign currency translation effect | December 31, 2016 | January 1, 2018 | Adjustment on initial application of IFRS 9 | January 1, 2018 adjusted for the effect of IFRS 9 | Tax (expense) benefit during the period recognised in profit or loss | Foreign currency translation effect | December 31, 2018 | |||||||||||||||||||||||||||||||
Deferred tax assets | ||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | 1,055 | (378 | ) | — | 677 | 759 | — | 759 | (373 | ) | — | 386 | ||||||||||||||||||||||||||||
Rehabilitation provision | 510 | 184 | — | 694 | 802 | — | 802 | (29 | ) | — | 773 | |||||||||||||||||||||||||||||
Inventory | 73 | 134 | (14 | ) | 193 | 179 | — | 179 | 1,537 | — | 1,716 | |||||||||||||||||||||||||||||
Accounts receivable | 258 | (94 | ) | (4 | ) | 160 | ||||||||||||||||||||||||||||||||||
Bad debt allowance | 854 | (159 | ) | (24 | ) | 671 | ||||||||||||||||||||||||||||||||||
Loans & borrowings | 224 | (106 | ) | — | 118 | |||||||||||||||||||||||||||||||||||
Finance lease liabilities | 1,508 | (389 | ) | 2 | 1,121 | |||||||||||||||||||||||||||||||||||
Accounts payable and other liabilities | 763 | (70 | ) | 7 | 700 | |||||||||||||||||||||||||||||||||||
Trade and other receivables | 735 | — | 735 | 52 | 3 | 790 | ||||||||||||||||||||||||||||||||||
Loans and borrowings | 313 | 822 | 1,135 | (815 | ) | — | 320 | |||||||||||||||||||||||||||||||||
Lease liabilities | 983 | — | 983 | (141 | ) | 1 | 843 | |||||||||||||||||||||||||||||||||
Trade and other payables and other liabilities | 656 | — | 656 | 213 | — | 869 | ||||||||||||||||||||||||||||||||||
Net operating loss carry-forwards | 10,611 | (5,807 | ) | (89 | ) | 4,715 | 7,972 | — | 7,972 | 5,646 | 5 | 13,623 | ||||||||||||||||||||||||||||
Other | 324 | (264 | ) | (1 | ) | 59 | 86 | — | 86 | (15 | ) | 3 | 74 | |||||||||||||||||||||||||||
Deferred tax liabilities | ||||||||||||||||||||||||||||||||||||||||
Property, plant and equipment | (16,199 | ) | 497 | 37 | (15,665 | ) | (15,869 | ) | — | (15,869 | ) | 429 | (28 | ) | (15,468 | ) | ||||||||||||||||||||||||
Mineral licenses | (7,701 | ) | 485 | — | (7,216 | ) | (6,652 | ) | (6,652 | ) | 276 | — | (6,376 | ) | ||||||||||||||||||||||||||
Rehabilitation provision | (8 | ) | 1 | — | (7 | ) | ||||||||||||||||||||||||||||||||||
Inventory | (604 | ) | (83 | ) | 3 | (684 | ) | (801 | ) | — | (801 | ) | (28 | ) | (5 | ) | (834 | ) | ||||||||||||||||||||||
Accounts receivable | (47 | ) | 41 | — | (6 | ) | ||||||||||||||||||||||||||||||||||
Bad debt allowance | (177 | ) | 59 | — | (118 | ) | ||||||||||||||||||||||||||||||||||
Loans & borrowings | (454 | ) | 350 | 1 | (103 | ) | ||||||||||||||||||||||||||||||||||
Accounts payable and other liabilities | (113 | ) | 74 | 1 | (38 | ) | ||||||||||||||||||||||||||||||||||
Other | (475 | ) | 421 | 3 | (51 | ) | ||||||||||||||||||||||||||||||||||
Trade and other receivables | (330 | ) | — | (330 | ) | (160 | ) | (9 | ) | (499 | ) | |||||||||||||||||||||||||||||
Loans and borrowings | (112 | ) | 50 | (62 | ) | (3,835 | ) | (1 | ) | (3,898 | ) | |||||||||||||||||||||||||||||
Trade and other payables and other liabilities | (119 | ) | — | (119 | ) | (161 | ) | (57 | ) | (337 | ) | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
Deferred tax assets (liabilities), net | (9,598 | ) | (5,104 | ) | (78 | ) | (14,780 | ) | (11,398 | ) | 872 | (10,526 | ) | 2,596 | (88 | ) | (8,018 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
| January 1, 2017 | Tax benefit (expense) during the period recognised in profit or loss | Foreign currency translation effect | December 31, 2017 | January 1, 2017 | Tax benefit (expense) during the period recognised in profit or loss | Foreign currency translation effect | December 31, 2017 | |||||||||||||||||||||||||
Deferred tax assets | ||||||||||||||||||||||||||||||||
Property, plant and equipment | 677 | 81 | 1 | 759 | 677 | 81 | 1 | 759 | ||||||||||||||||||||||||
Rehabilitation provision | 694 | 108 | 0 | 802 | 694 | 108 | — | 802 | ||||||||||||||||||||||||
Inventory | 193 | (9 | ) | (5 | ) | 179 | 193 | (9 | ) | (5 | ) | 179 | ||||||||||||||||||||
Accounts receivable | 160 | 26 | 0 | 186 | ||||||||||||||||||||||||||||
Bad debt allowance | 671 | (118 | ) | (4 | ) | 549 | ||||||||||||||||||||||||||
Loans & borrowings | 118 | 195 | 0 | 313 | ||||||||||||||||||||||||||||
Finance lease liabilities | 1,121 | (138 | ) | 0 | 983 | |||||||||||||||||||||||||||
Accounts payable and other liabilities | 700 | (31 | ) | (13 | ) | 656 | ||||||||||||||||||||||||||
Trade and other receivables | 831 | (92 | ) | (4 | ) | 735 | ||||||||||||||||||||||||||
Loans and borrowings | 118 | 195 | — | 313 | ||||||||||||||||||||||||||||
Lease liabilities | 1,121 | (138 | ) | — | 983 | |||||||||||||||||||||||||||
Trade and other payables and other liabilities | 700 | (31 | ) | (13 | ) | 656 | ||||||||||||||||||||||||||
Net operating loss carry-forwards | 4,715 | 3,248 | 9 | 7,972 | 4,715 | 3,248 | 9 | 7,972 | ||||||||||||||||||||||||
Other | 59 | 26 | 1 | 86 | 59 | 26 | 1 | 86 | ||||||||||||||||||||||||
Deferred tax liabilities | ||||||||||||||||||||||||||||||||
Property, plant and equipment | (15,665 | ) | (193 | ) | (11 | ) | (15,869 | ) | (15,665 | ) | (193 | ) | (11 | ) | (15,869 | ) | ||||||||||||||||
Mineral licenses | (7,216 | ) | 564 | 0 | (6,652 | ) | (7,216 | ) | 564 | — | (6,652 | ) | ||||||||||||||||||||
Rehabilitation provision | (7 | ) | 0 | 0 | (7 | ) | ||||||||||||||||||||||||||
Inventory | (684 | ) | (117 | ) | 0 | (801 | ) | (684 | ) | (117 | ) | — | (801 | ) | ||||||||||||||||||
Accounts receivable | (6 | ) | (18 | ) | 0 | (24 | ) | |||||||||||||||||||||||||
Bad debt allowance | (118 | ) | (189 | ) | 1 | (306 | ) | |||||||||||||||||||||||||
Loans & borrowings | (103 | ) | (9 | ) | 0 | (112 | ) | |||||||||||||||||||||||||
Accounts payable and other liabilities | (38 | ) | 0 | 0 | (38 | ) | ||||||||||||||||||||||||||
Other | (51 | ) | (25 | ) | 2 | (74 | ) | |||||||||||||||||||||||||
Trade and other receivables | (124 | ) | (207 | ) | 1 | (330 | ) | |||||||||||||||||||||||||
Loans and borrowings | (103 | ) | (9 | ) | — | (112 | ) | |||||||||||||||||||||||||
Trade and other payables and other liabilities | (96 | ) | (25 | ) | 2 | (119 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Deferred tax assets (liabilities), net | (14,780 | ) | 3,401 | (19 | ) | (11,398 | ) | (14,780 | ) | 3,401 | (19 | ) | (11,398 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Recognised in the consolidated statement of financial position informationposition:
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Deferred tax assets | 96 | 1,502 | 3,648 | 5,488 | ||||||||||||
Deferred tax liabilities | (11,494 | ) | (16,282 | ) | (13,877 | ) | (13,506 | ) | ||||||||
|
|
|
| |||||||||||||
Deferred tax liabilities, net | (11,398 | ) | (14,780 | ) | (10,229 | ) | (8,018 | ) | ||||||||
|
|
|
| |||||||||||||
The Group offsets tax assets and liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and deferred tax assets and deferred tax liabilities relate to income taxes levied by the same tax authority.
For financial reporting purposes, the Group has not recognised deferred tax assets in the amount of RUB 35,16129,600 million (2016:(2018: RUB 38,06833,216 million) on losses in the amount of RUB 194,659150,460 million (2016:(2018: RUB 208,748177,639 million) that are available to carry forward against future taxable income of the subsidiaries in which the losses arose. Deferred tax assets have not been recognised in respect of these losses as it is not probable that future taxable profit will be available for utilization of such assets. Deferred tax assets on net operating loss carry forwards which are considered to be realizablerealisable in the future, are mostly related to the Russian subsidiaries.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
The Group does not recognize deferred tax assets for accumulated tax losses received before joining the consolidated group of taxpayers.
In case when companies with accumulated tax loss before joining the consolidated group of taxpayers come out of the consolidated group of taxpayers or the law changes, in case there is a probability of obtaining sufficient taxable profit, deferred tax assets for accumulated tax losses before joining the consolidated group of taxpayers will be recognised.
A deferred tax liability of approximately RUB 210305 million and RUB 288302 million as of December 31, 20172019 and 2016,2018, respectively, has not been recognised for temporary differences related to the Group’s investment in foreign subsidiaries primarily as a result of unremitted earnings of consolidated subsidiaries, as it is the Group’s intention, generally, to reinvest such earnings permanently.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Similarly, a deferred tax liability of approximately RUB 105 million and nil as of December 31, 20172019 and 2016, no deferred tax liability2018, respectively, has not been recognised for temporary difference related to unremitted earnings of consolidated domestic subsidiaries as management believes the Group has bothis able to control the abilitytiming of the reversal of these temporary differences and intentiondoes not intend to effect atax-free reorganization or merger of major subsidiaries into Mechel. There are no income tax consequences attached toreverse them in the payment of dividends by the Group to its shareholders.foreseeable future.
Probable income tax risks of RUB 3,1398,984 million and RUB 1626,314 million as of December 31, 20172019 and 2016,2018, respectively, have been recorded in the Group’s consolidated financial statements. Due to changes in the Russian tax legislation effective January 1, 2017, calculation of the consolidated tax base of the consolidated group of taxpayers and the way to offset current losses and losses received in the previous tax periods (before January 2017) were changed. Due to the absence of official explanations of the regulatory authorities concerning changes, through 2017, there is an uncertainty in the interpretation. The Group does not believe that any other material income tax matters exist relating to the Group, including current pending or future governmental claims and demands, which would require adjustment to the accompanying consolidated financial statements in order for those statements not to be materially misstated or misleading as of December 31, 2019.
Possible income tax risks of RUB 7941,663 million and RUB 1,1192,745 million as of December 31, 20172019 and 2016,2018, respectively, have not been recognised in the Group’s consolidated financial statements.
Taxes and similar charges payable other than income tax |
| December 31, 2017 | December 31, 2016 | |||||||
VAT payable | 3,313 | 4,274 | ||||||
Payroll taxes | 2,010 | 3,029 | ||||||
Property tax | 504 | 920 | ||||||
Land lease | 433 | 342 | ||||||
Mineral extraction tax | 189 | 277 | ||||||
Land tax | 153 | 223 | ||||||
Other | 94 | 130 | ||||||
|
|
|
| |||||
Total | 6,696 | 9,195 | ||||||
|
|
|
| |||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
| December 31, 2019 | December 31, 2018 | |||||||
Payroll taxes | 3,353 | 2,424 | ||||||
VAT payable | 4,120 | 2,233 | ||||||
Property tax | 566 | 511 | ||||||
Land lease | 454 | 471 | ||||||
Mineral extraction tax | 332 | 226 | ||||||
Land tax | 240 | 125 | ||||||
Other | 163 | 116 | ||||||
|
|
|
| |||||
Total | 9,228 | 6,106 | ||||||
|
|
|
| |||||
Pensions and other post-employment benefit plans |
In addition to the state pension and social insurance required by the Russian legislation, the Group has a number of defined benefit pension plans that cover the majority of production employees and some other postretirement benefit plans.
A number of the Group’s companies provide their former employees withnon-state retirement pensions, which are conditional on the member qualifying for the state old age pension. Some employees are also eligible for an early retirement in accordance with the state pension regulations and specificregulations. Specific coal industry rules(so-called “territorial treaties”), which also provide for certain benefits upon reaching retirement age. Additionally, the Group voluntarily provides financial support, of a defined benefit nature, to its old age and disabled pensioners, who did not acquire any pension under thenon-state pension plans.
The Group also provides several types of long-term employee benefits such asdeath-in-service benefit and invalidity pension of a defined benefit nature. The Group also provides former employees with reimbursement of
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
fuel and energy resources, coal and wood used for heating purposes. In addition,one-time lump sum benefits are paid to employees of a number of the Group’s companies upon retirement depending on the employment service with the Group and the salary level of an individual employee. All pension plans are unfunded until the qualifying event occurs.
Prior to June 2016, majority of the Group’s entities contributed certain amounts of cash tonon-state pension fund Mechel Fund, to invest pensions of its participants. Pursuant to the agreements between the Group and thisnon-state pension fund, under certain circumstances, assets from contributions were not effectively restricted from possible withdrawal by the employer. Based on this fact, these assets were not qualified as “plan assets” under IFRS and these pension plans were considered to be fully unfunded. On June 22, 2016, Mechel Fund stopped all operations after cancellation by the Russian regulator of its license for the activity on pension and pension insurance. In the second half of 2016, the Group voluntarily started to make payments to pensioners retired after June 22, 2016 until the new pension fund would be selected by the Group.
As of December 31, 2017,2019, there were 48,92047,288 active participants under the defined benefit pension plans and other long-term benefit plans and 39,42737,814 pensioners receiving monthly pensions or other regular financial support from these plans. As of December 31, 20162018 and January 1, 2016,December 31, 2017, the related figures were 50,36948,531 and 54,86648,920 of active participants under the defined benefit pension plans and other long-term benefits and 39,55138,751 and 39,20139,427 pensioners receiving monthly pensions or other regular financial support from these plans, respectively. The majority of employees at the Group’s major subsidiaries belong to the trade unions.
Actuarial valuation of pensions and other long-term benefits for the major subsidiaries was performed in February 2018,January 2020, with the measurement date of December 31, 2017.2019. Members’ census data as of that date was collected for all relevant business units of the Group.
Pension obligations and expenses determined by the Group are supported by an independent qualified actuary in accordance with the “Projected Unit Credit method” of calculation of actuarial present value of future liabilities.
The state retirement age is one of the factors affecting the retirement of employees from the Group. In October 2018, the state gradually changed the previously established national retirement age; the Group took this circumstance into account in the actuarial valuation of the obligations. The effect of the revaluation of the retirement benefit obligation due to the amended pension legislation of the Russian Federation was reflected as the cost of past services in 2018.
As of December 31, 2017,2019, defined benefit obligations, including pension obligations in the amount of RUB 4,0524,745 million and other long-term benefit obligations in the amount of RUB 309803 million (RUB 3,6403,806 million and 805785 million as of December 31, 2016,2018, respectively), were presented within Pension obligations in the consolidated statement of financial position.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Changes in the present value of the defined benefit obligations and other long-term benefits and fair value of plan assets for 2015 were as follows:
| Pension obligation | Fair value of plan assets | Benefit liability | ||||||||||
January 1, 2015 | (4,799 | ) | 282 | (4,517 | ) | |||||||
|
|
|
|
|
| |||||||
Current service cost | (167 | ) | — | (167 | ) | |||||||
Net interest expense | (418 | ) | 5 | (413 | ) | |||||||
Curtailment / settlement gain | 142 | — | 142 | |||||||||
Past service cost | (25 | ) | — | (25 | ) | |||||||
|
|
|
|
|
| |||||||
Sub-total included in profit or loss | (468 | ) | 5 | (463 | ) | |||||||
|
|
|
|
|
| |||||||
Benefit paid | 432 | (21 | ) | 411 | ||||||||
|
|
|
|
|
| |||||||
Exchange difference | (155 | ) | 45 | (110 | ) | |||||||
Actuarial changes arising from changes in demographic assumptions | 116 | — | 116 | |||||||||
Actuarial changes arising from changes in financial assumptions | (119 | ) | — | (119 | ) | |||||||
Experience adjustments | (191 | ) | — | (191 | ) | |||||||
|
|
|
|
|
| |||||||
Sub-total included in OCI | (349 | ) | 45 | (304 | ) | |||||||
|
|
|
|
|
| |||||||
Contributions by employer | — | 7 | 7 | |||||||||
|
|
|
|
|
| |||||||
December 31, 2015 | (5,184 | ) | 318 | (4,866 | ) | |||||||
|
|
|
|
|
| |||||||
Changes in the present value of the pension obligations and other long-term benefits and fair value of plan assets for 2016 were as follows:
| Pension obligation | Fair value of plan assets | Benefit liability | ||||||||||
December 31, 2015 | (5,184 | ) | 318 | (4,866 | ) | |||||||
|
|
|
|
|
| |||||||
Current service cost | (149 | ) | — | (149 | ) | |||||||
Net interest expense | (381 | ) | 13 | (368 | ) | |||||||
Curtailment / settlement gain | 272 | — | 272 | |||||||||
Remeasurement of pension obligations | 53 | — | 53 | |||||||||
Past service cost | (5 | ) | — | (5 | ) | |||||||
|
|
|
|
|
| |||||||
Sub-total included in profit or loss | (210 | ) | 13 | (197 | ) | |||||||
|
|
|
|
|
| |||||||
Benefit paid | 357 | (16 | ) | 341 | ||||||||
|
|
|
|
|
| |||||||
Exchange difference | 363 | (63 | ) | 300 | ||||||||
Actuarial changes arising from changes in demographic assumptions | 80 | — | 80 | |||||||||
Actuarial changes arising from changes in financial assumptions | (397 | ) | — | (397 | ) | |||||||
Experience adjustments | 294 | — | 294 | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in OCI | 340 | (63 | ) | 277 | ||||||||
|
|
|
|
|
| |||||||
December 31, 2016 | (4,697 | ) | 252 | (4,445 | ) | |||||||
|
|
|
|
|
| |||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Changes in the present value of the pension obligations and other long-term benefits and fair value of plan assets for 2017 were as follows:
| Pension obligation | Fair value of plan assets | Benefit liability | Pension obligation | Fair value of plan assets | Benefit liability | |||||||||||||||||||
December 31, 2016 | (4,697 | ) | 252 | (4,445 | ) | (4,697 | ) | 252 | (4,445 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Current service cost | (142 | ) | 0 | (142 | ) | (142 | ) | — | (142 | ) | ||||||||||||||
Net interest expense | (331 | ) | 17 | (314 | ) | (331 | ) | 17 | (314 | ) | ||||||||||||||
Curtailment / settlement gain | 1 | 0 | 1 | 1 | — | 1 | ||||||||||||||||||
Remeasurement of pension obligations | 174 | 0 | 174 | |||||||||||||||||||||
Remeasurement of other long-term benefit obligations | 174 | — | 174 | |||||||||||||||||||||
Past service cost | 0 | 0 | 0 | — | — | — | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Sub-total included in profit or loss | (298 | ) | 17 | (281 | ) | (298 | ) | 17 | (281 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Benefit paid | 313 | (17 | ) | 296 | 313 | (17 | ) | 296 | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Exchange difference | (95 | ) | 19 | (76 | ) | (95 | ) | 19 | (76 | ) | ||||||||||||||
Actuarial changes arising from changes in demographic assumptions | 51 | 0 | 51 | 51 | — | 51 | ||||||||||||||||||
Actuarial changes arising from changes in financial assumptions | (69 | ) | 0 | (69 | ) | (69 | ) | — | (69 | ) | ||||||||||||||
| ||||||||||||||||||||||||
Experience adjustments | 163 | 163 | 163 | — | 163 | |||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Sub-total included in OCI | 50 | 19 | 69 | 50 | 19 | 69 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
December 31, 2017 | (4,632 | ) | 271 | (4,361 | ) | (4,632 | ) | 271 | (4,361 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Changes in the present value of the pension obligations and other long-term benefits and fair value of plan assets for 2018 were as follows:
| Pension obligation | Fair value of plan assets | Benefit liability | ||||||||||
December 31, 2017 | (4,632 | ) | 271 | (4,361 | ) | |||||||
|
|
|
|
|
| |||||||
Current service cost | (130 | ) | — | (130 | ) | |||||||
Net interest expense | (266 | ) | (13 | ) | (279 | ) | ||||||
Curtailment / settlement gain | 4 | — | 4 | |||||||||
Remeasurement of other long-term benefit obligations | (492 | ) | — | (492 | ) | |||||||
Past service cost | 70 | — | 70 | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in profit or loss | (814 | ) | (13 | ) | (827 | ) | ||||||
|
|
|
|
|
| |||||||
Benefit paid | 299 | (17 | ) | 282 | ||||||||
|
|
|
|
|
| |||||||
Exchange difference | (213 | ) | 41 | (172 | ) | |||||||
Actuarial changes arising from changes in demographic assumptions | (38 | ) | — | (38 | ) | |||||||
Actuarial changes arising from changes in financial assumptions | 354 | — | 354 | |||||||||
Experience adjustments | 171 | — | 171 | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in OCI | 274 | 41 | 315 | |||||||||
|
|
|
|
|
| |||||||
December 31, 2018 | (4,873 | ) | 282 | (4,591 | ) | |||||||
|
|
|
|
|
| |||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Changes in the present value of the pension obligations and other long-term benefits and fair value of plan assets for 2019 were as follows:
| Pension obligation | Fair value of plan assets | Benefit liability | ||||||||||
December 31, 2018 | (4,873 | ) | 282 | (4,591 | ) | |||||||
|
|
|
|
|
| |||||||
Current service cost | (210 | ) | — | (210 | ) | |||||||
Net interest expense | (297 | ) | 4 | (293 | ) | |||||||
Curtailment / settlement gain | — | — | — | |||||||||
Remeasurement of other long-term benefit obligations | (25 | ) | — | (25 | ) | |||||||
Past service cost | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Sub-total included in profit or loss | (532 | ) | 4 | (528 | ) | |||||||
|
|
|
|
|
| |||||||
Benefit paid | 344 | (7 | ) | 337 | ||||||||
|
|
|
|
|
| |||||||
Exchange difference | 117 | (16 | ) | 101 | ||||||||
Actuarial changes arising from changes in demographic assumptions | (88 | ) | — | (88 | ) | |||||||
Actuarial changes arising from changes in financial assumptions | (772 | ) | — | (772 | ) | |||||||
Experience adjustments | (7 | ) | — | (7 | ) | |||||||
|
|
|
|
|
| |||||||
Sub-total included in OCI | (750 | ) | (16 | ) | (766 | ) | ||||||
|
|
|
|
|
| |||||||
December 31, 2019 | (5,811 | ) | 263 | (5,548 | ) | |||||||
|
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|
|
|
| |||||||
In 2019, the effect of actuarial changes arising from changes in financial assumptions is connected with the significant decrease in discount rate.
Amounts of the pension obligations recognizedrecognised in the consolidated statement of the financial position were as follows:
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Current liabilities | (849 | ) | (944 | ) | 615 | 772 | ||||||||||
Non-current liabilities | (3,512 | ) | (3,501 | ) | 4,933 | 3,819 | ||||||||||
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|
|
| |||||||||||||
Total net pension obligations | (4,361 | ) | (4,445 | ) | 5,548 | 4,591 | ||||||||||
|
|
|
| |||||||||||||
The plan asset allocation of the investment portfolio was as follows as of December 31, 20172019 and 2016:2018:
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Debt instruments | 147 | 142 | 142 | 161 | ||||||||||||
Equity instruments | 78 | 64 | 82 | 74 | ||||||||||||
Cash and cash equivalents | 25 | 23 | 18 | 19 | ||||||||||||
Property | 11 | 9 | 12 | 15 | ||||||||||||
Other assets | 10 | 14 | 9 | 13 | ||||||||||||
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|
|
| |||||||||||||
Total plan assets | 271 | 252 | 263 | 282 | ||||||||||||
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|
| |||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The investment strategy employed includes an overall goal to attain a maximum investment return with a strong focus on limiting the amount of risk taken. The strategy is to invest with a medium- to long-term
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
perspective while maintaining a level of liquidity through proper allocation of investment assets. Investment policies include rules to avoid concentrations of investments. The vast majority of plan assets are measured using quoted prices in active markets for identical assets (Level 1 assets). The investment portfolio is primarily comprised of debt and equity instruments. Real estate and other alternative investments asset can be included when these have favorable return and risk characteristics. Debt instruments include investment grade and high yield corporate and government bonds with fixed yield and mostly short- to medium maturities. Equity instruments include selected investments in equity securities listed on active exchange market. The valuation of debt and equity securities is determined using a market approach, and is based on an unadjusted quoted prices.
The Group’s entities have a practice to providelump-sum financial support to former employees as well as certain life-long benefits, so there is a risk of human longevity.changes in the life expectancy for pensioners. This risk is controlled by using most recent life expectancy tables. The risk of a significant fluctuation in interest rates is offset by actuarial best estimate assumptions in respect of discount rates. The Group does not identify the unusual, specific business plan or risk, as well as any significant risk concentrations. The Group performs sensitivity analysis calculating the whole defined benefit obligation and other long-term benefits obligation in different actuarial assumptions and comparing the results. There are no changes from the previous period in the methods and set of assumptions used in preparing the sensitivity analyses. The weighted average duration of the defined benefit obligation and other long-term benefits obligation is about 11around 12 years at both reporting dates.as of December 31, 2019 and 2018.
The key actuarial assumptions used to determine defined benefit obligations were as follows as of December 31, 20172019 and 2016:2018:
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Discount rate | ||||||||||||||||
Russian entities | 7.6 | % | 8.5 | % | 6.60 | % | 8.60 | % | ||||||||
German entities | 1.80 | % | 1.50 | % | 1.10 | % | 1.90 | % | ||||||||
Ukrainian entity | 10.10 | % | 11.10 | % | 5.70 | % | 11.80 | % | ||||||||
Austrian entities | 1.50 | % | 1.50 | % | 0.75 | % | 1.70 | % | ||||||||
Inflation rates | ||||||||||||||||
Russian entities | 4.40 | % | 5.00 | % | 4.00 | % | 4.00 | % | ||||||||
Ukrainian entity | 8.60 | % | 8.60 | % | 6.70 | % | 6.60 | % | ||||||||
Rate of compensation increase | ||||||||||||||||
Russian entities | 5.40 | % | 6.00 | % | 5.10 | % | 5.00 | % | ||||||||
German entities | 4.00 | % | 4.00 | % | 4.00 | % | 4.00 | % | ||||||||
Ukrainian entity | 11.60 | % | 11.60 | % | 9.90 | % | 9.60 | % | ||||||||
Austrian entities | 2.25 | % | 2.25 | % | 2.25 | % | 2.25 | % | ||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The results of sensitivity analysis of defined benefit obligations for the Russian and Ukrainian entities as of December 31, 20172019 and 20162018 are presented below:
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
Discount rate | ||||||||||||||||
1% increase | -8.12 | % | -7.73 | % | -9.20 | % | -6.75 | % | ||||||||
1% decrease | 9.64 | % | 9.13 | % | 11.00 | % | 7.85 | % | ||||||||
Inflation rate | ||||||||||||||||
1% increase | 6.48 | % | 5.93 | % | 5.90 | % | 5.09 | % | ||||||||
1% decrease | -5.42 | % | -5.00 | % | -5.00 | % | -4.37 | % | ||||||||
Rate of compensation increase | ||||||||||||||||
1% increase | 2.72 | % | 2.76 | % | 4.00 | % | 2.48 | % | ||||||||
1% decrease | -2.28 | % | -2.51 | % | -3.60 | % | -2.23 | % | ||||||||
Turnover rate | ||||||||||||||||
3% increase | -5.29 | % | -5.20 | % | -7.40 | % | -5.98 | % | ||||||||
3% decrease | 7.25 | % | 7.07 | % | 7.90 | % | 7.87 | % | ||||||||
The results of sensitivity analysis of defined benefit obligations for Austrian entities as of December 31, 20172019 and 20162018 are presented below:
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
Discount rate | ||||||||||||||||
1% increase | -9.70 | % | -10.10 | % | -10.20 | % | -10.03 | % | ||||||||
1% decrease | 11.70 | % | 12.20 | % | 12.20 | % | 11.98 | % | ||||||||
The results of sensitivity analysis of defined benefit obligations for German entities as of December 31, 20172019 and 20162018 are presented below:
| 2017 | 2016 | 2019 | 2018 | |||||||||||||
Discount rate | ||||||||||||||||
1% increase | -12.00 | % | -12.00 | % | -12.00 | % | -12.00 | % | ||||||||
1% decrease | 18.00 | % | 18.00 | % | 18.00 | % | 18.00 | % | ||||||||
The sensitivity analyses above have been prepared based on a method that extrapolates the impact on the defined benefit pension obligations and other long-term benefits obligations as a result of reasonable changes in key assumptions occurring at the end of the reporting period. The sensitivity analyses are based on a change in one significant assumption, keeping all other assumptions constant. The sensitivity analysis may not be representative of an actual change in the defined benefit obligationobligations and otherlong-term benefits obligationobligations as it is unlikely that changes in assumptions would occur in isolation of one another.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The following payments are expected contributions to the defined benefit plan and other long-term benefits in the future years:
| ||||
| ||||
| ||||
| ||||
| 22. | Provisions | |||
| ||||
| Rehabilitation provision | Provisions for legal claims | Provisions for taxes other than income tax | Other provisions | Total | ||||||||||||||||
At December 31, 2014 | 3,199 | 1,089 | 620 | 220 | 5,128 | |||||||||||||||
Arising during the year | 403 | 1,321 | 361 | 27 | 2,112 | |||||||||||||||
Utilized | — | (513 | ) | (504 | ) | (81 | ) | (1,098 | ) | |||||||||||
Revision in estimated cash flow | (1,027 | ) | — | — | — | (1,027 | ) | |||||||||||||
Unused amounts reversed | — | (325 | ) | (101 | ) | — | (426 | ) | ||||||||||||
Discount rate adjustment and imputed interest | 1,129 | — | — | — | 1,129 | |||||||||||||||
Exchange differences | — | — | 104 | 49 | 153 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At December 31, 2015 | 3,704 | 1,572 | 480 | 215 | 5,971 | |||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||
Current | 265 | 1,572 | 480 | 215 | 2,532 | |||||||||||||||
Non-current | 3,439 | — | — | — | 3,439 | |||||||||||||||
Arising during the year | 256 | 533 | 413 | 1,678 | 2,880 | |||||||||||||||
Utilized | (52 | ) | (885 | ) | (14 | ) | (118 | ) | (1,069 | ) | ||||||||||
Revision in estimated cash flow | (511 | ) | — | — | — | (511 | ) | |||||||||||||
Unused amounts reversed | — | (474 | ) | (31 | ) | — | (505 | ) | ||||||||||||
Discount rate adjustment and imputed interest | 281 | — | — | — | 281 | |||||||||||||||
Exchange differences | — | — | (88 | ) | (43 | ) | (131 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
At December 31, 2016 | 3,678 | 746 | 760 | 1,732 | 6,916 | |||||||||||||||
|
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|
|
|
|
| |||||||||||
Current | 258 | 746 | 760 | 1,732 | 3,496 | |||||||||||||||
Non-current | 3,420 | 0 | 0 | 0 | 3,420 | |||||||||||||||
Arising during the year | 311 | 2,175 | 23 | 7 | 2,516 | |||||||||||||||
Utilized | (79 | ) | (451 | ) | (1 | ) | (905 | ) | (1,436 | ) | ||||||||||
Revision in estimated cash flow | (339 | ) | 0 | 0 | 0 | (339 | ) | |||||||||||||
Unused amounts reversed | 0 | (180 | ) | (232 | ) | (551 | ) | (963 | ) | |||||||||||
Discount rate adjustment and imputed interest | 421 | 0 | 0 | 0 | 421 | |||||||||||||||
Exchange differences | 0 | 0 | 26 | 32 | 58 | |||||||||||||||
|
|
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|
|
| |||||||||||
At December 31, 2017 | 3,992 | 2,290 | 576 | 315 | 7,173 | |||||||||||||||
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| |||||||||||
Current | 178 | 2,290 | 576 | 315 | 3,359 | |||||||||||||||
Non-current | 3,814 | 0 | 0 | 0 | 3,814 | |||||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
| Rehabilitation provision | Provisions for legal claims | Provisions on taxes other than income tax, fines and penalties | Other provisions | Total | ||||||||||||||||
At December 31, 2016 | 3,678 | 746 | 760 | 1,732 | 6,916 | |||||||||||||||
|
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|
| |||||||||||
Arising during the year | — | 2,175 | 23 | 7 | 2,205 | |||||||||||||||
Utilized | (79 | ) | (451 | ) | (1 | ) | (905 | ) | (1,436 | ) | ||||||||||
Revision in estimated cash flow and discount rate change | 82 | — | — | — | 82 | |||||||||||||||
Unused amounts reversed | — | (180 | ) | (232 | ) | (551 | ) | (963 | ) | |||||||||||
Unwinding of discount | 311 | — | — | — | 311 | |||||||||||||||
Exchange differences | — | — | 26 | 32 | 58 | |||||||||||||||
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| |||||||||||
At December 31, 2017 | 3,992 | 2,290 | 576 | 315 | 7,173 | |||||||||||||||
|
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| |||||||||||
Current | 178 | 2,290 | 576 | 315 | 3,359 | |||||||||||||||
Non-current | 3,814 | — | — | — | 3,814 | |||||||||||||||
Arising during the year | — | 1,516 | 199 | 905 | 2,620 | |||||||||||||||
Utilized | (77 | ) | (273 | ) | — | (256 | ) | (606 | ) | |||||||||||
Revision in estimated cash flow and discount rate change | (309 | ) | — | — | — | (309 | ) | |||||||||||||
Unused amounts reversed | — | (646 | ) | (188 | ) | (20 | ) | (854 | ) | |||||||||||
Unwinding of discount | 302 | — | — | — | 302 | |||||||||||||||
Exchange differences | — | 215 | (4 | ) | 4 | 215 | ||||||||||||||
|
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| |||||||||||
At December 31, 2018 | 3,908 | 3,102 | 583 | 948 | 8,541 | |||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||
Current | 189 | 3,102 | 583 | 948 | 4,822 | |||||||||||||||
Non-current | 3,719 | — | — | — | 3,719 | |||||||||||||||
Arising during the year | — | 1,346 | 980 | — | 2,326 | |||||||||||||||
Utilized | (30 | ) | (264 | ) | — | (722 | ) | (1,016 | ) | |||||||||||
Revision in estimated cash flow and discount rate change | 1,180 | — | — | — | 1,180 | |||||||||||||||
Unused amounts reversed | — | (1,200 | ) | (9 | ) | (197 | ) | (1,406 | ) | |||||||||||
Unwinding of discount | 345 | — | — | — | 345 | |||||||||||||||
Exchange differences | — | (150 | ) | (19 | ) | (5 | ) | (174 | ) | |||||||||||
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| |||||||||||
At December 31, 2019 | 5,403 | 2, 834 | 1,535 | 24 | 9,796 | |||||||||||||||
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| |||||||||||
Current | 165 | 2, 834 | 1,535 | 24 | 4,558 | |||||||||||||||
Non-current | 5,238 | — | — | — | 5,238 | |||||||||||||||
Rehabilitation provision
The Group has numerous site rehabilitation obligations that it is required to perform under law or contract once an asset is permanently taken out of service. The main part of these obligations is not expected to be paid in a foreseeable future, and will be funded from the general Group’s resources when respective works will be
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
performed. The Group’s rehabilitation provisions primarily relate to its steel and mining production facilities with related landfills and dump areas and its mines. In 2019, the increase in rehabilitation provision is mostly due to significant decrease in discount rate.
Provisions for legal claims
As of December 31, 2016, management assessed the outflow of resources embodying economic benefits as possibleA provision for the claims of Minmetals Engineering Co. Ltd (“Minmetals”)related to the Group. Minmetals sued CMP for work performed of $143 million (RUB 8,675 million at exchange rate as of December 31, 2016). CMP issued a claim to Minmetalsdisputes over purchases was recognised in the amount of $58RUB 741 million (RUB 3,492 million at exchange rate as of December 31, 2016)in 2018 and 4 million euro (RUB 267 million at exchange rate as of December 31, 2016).reversed in 2019 due to favorable court judgment.
Legal claim contingency
As of December 31, 2017, management’s estimation in respect2019, management assesses the outcome of several court proceedings and claims from Minmetals changed because of negative court judgment and therefore provision was recognizedwhere the Group’s companies act as defendants in the aggregate amount of $18RUB 2,195 million (RUB 1,045 million atas possible based on the exchange rate asmanagement’s analysis and discussions with the legal advisers.
As of December 31, 2017)2019, the Group as a defendant is involved in the court proceeding regarding the claim from one of the metallurgical plants as defined in Note 8(a).
It is not practicable to estimate the potential effect of this claim and the timing of the payment, if any. The Group has been advised by its legal counsel that it is subject to various other lawsuits, claims and proceedings related to matters incidental toonly possible, but not probable, that the business. Accruals for probable cash outflows have been made based on an assessment of a combination of litigation and settlement strategies. It is possible that results of operations in any future period could be materially affected by changes in assumptions or by the actual effectiveness of such strategies.action will succeed.
Provisions on taxes other than income tax
Management believes that it has paid or accrued all applicable taxes. Where uncertainty exists, the Group has accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits which will be required to settle these liabilities. In accordance with IAS 37,Provisions, Contingent Liabilities and Contingent Assets, the Group recorded RUB 5761,535 million and RUB 760583 million of other tax claims including fines and penalties that management believes are probable as of December 31, 20172019 and 2016,2018, respectively.
The Group does not believe that any other material tax matters exist relating to the Group, including current pending or future governmental claims and demands, which would require adjustment to the accompanying consolidated financial statements in order for those statements not to be materially misstated or misleading as of December 31, 2017.2019.
Possible tax liabilities on taxes other than income tax, which were identified by management as those that can be subject to different interpretations of the tax law and regulations, are not accrued in the consolidated financial statements. The amount of such liabilities was RUB 1,904 million and RUB 1,689 million as of December 31, 2019 and 2018, respectively.
Environmental
Possible liabilities, which were identified by management as those that can be subject to potential claims from environmental authorities, are not accrued in the consolidated financial statements. The amount of such liabilities was not significant.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Issued capital and reserves |
Common shares
The capital stock of Mechel PAO consists of 416,270,745 common shares, each with a nominal value of 10 Russian rubles, all of which are issued, outstandingfully paid for and fully paidoutstanding under the Russian law. Thelaw, of which 1,018,996 and nill were owned by one of the Group’s subsidiaries as of December 31, 2019 and 2018, respectively. In December 2019, the Group reacquired 1,018,996 common shares for RUB 63 million. Mechel PAO is authorizedauthorised to issue an additional 81,698,341 common shares with a nominal value of 10 Russian rubles each.
Preferred shares
As of December 31, 20172019 and 2016,2018, the Group had 138,756,915 preferred shares with a nominal value of 10 Russian rubles each, authorizedauthorised and issued under the Russian law and representing 25% of the Mechel PAO’s
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
share capital, of which 83,963,279 and 83,254,149 shares were outstanding and fully paid for, and the remaining 54,793,636 and 55,502,766 shares were kept as treasury stockowned by one of the Group’s subsidiaries. In December 2019, the Group sold 709,130 preferred shares for RUB 63 million. Under the Russian law and the Mechel PAO’s Charter, these preferred shares arenon-cumulative and have no voting rights, except for cases stipulated by the law including, when dividends are not paid inand the year.Charter. The dividend yield paid per one preferred share is also fixed by the Charter and amounts to 20% of the consolidated annual net profit of the Group under IFRS divided by 138,756,915 issued preferred shares.
Distributions made and proposed
In accordance with applicable legislation, Mechel and its subsidiaries can distribute all profits as dividends or transfer them to reserves.reserves in accordance with applicable legislation and the charters. Dividends may only be declared from accumulated undistributed and unreserved earnings as shown in the statutory financial statements of both Russian and foreign Group’s subsidiaries. Dividends from Russian companies are generally subject to a 13% withholding tax for residents (9% for the periods prior to 2015) and 15% fornon-residents, which could be reduced or eliminated if paid to foreign owners under certain applicable double tax treaties.
Effective January 1, 2008, intercompany dividends may be subject to a withholding tax of 0% (if at the date of dividends declaration, the dividend-recipient Russian company held a controlling (over 50%) interest in the share capital of the company (Russian or foreign) of the dividend payer for a period over one year and the residence of the dividend distribution foreign company is not included into the Ministry of Finance offshore list. Herewith 0% tax rate is not applicable to the income received by foreign entities that are recognizedrecognised as Russian residents in accordance with the Russian Tax Code.
On June 14 2019, the Group’s subsidiary declared dividends attributable to non-controlling interests of RUB 0.030 million for 2018. On June 28, 2019, Mechel declared dividends of RUB 1,516 million (RUB 18.21 per preferred share) to the third party holders of preferred shares for 2018.
On June 29, 2018, the Group’s subsidiaries declared dividends attributable to non-controlling interests of RUB 0.056 million and Mechel declared dividends of RUB 1,387 million (RUB 16.66 per preferred share) to the holders of preferred shares for 2017.
On June 30, 2017, the Group’s subsidiaries declared dividends attributable tonon-controlling interests of RUB 359 million and Mechel declared dividends of RUB 856 million (RUB 10.28 per preferred share) to the holders of preferred shares for 2016.
On June 30, 2016, one
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2019
(All amounts are in millions of the Group’s subsidiaries declared dividends attributable tonon-controlling interests of RUB 3 million and Mechel declared dividends of RUB 4 million (RUB 0.05 per preferred share) to the holders of preferred shares for 2015.Russian rubles, unless stated otherwise)
On June 30, 2015, one of the Group’s subsidiaries declared a dividends attributable tonon-controlling interests of RUB 0,3 million and Mechel declared dividends of RUB 4 million (RUB 0.05 per preferred share) to the holders of preferred shares for 2014.
Additional-paid-in-capitalAdditional paid-in capital
In 2017,additional-paid-in-capital additional paid-in capital was decreased by RUB 3,948 million due to the acquisition ofnon-controlling interests of 2.53% and 0.21% in certain Group’s subsidiaries with the negative carrying value of RUB 590 million.
In 2015,additional-paid-in-capital was increased by RUB 2,730 million due to the acquisition ofnon-controlling interests of 22.95%, 0.04% and 0.39% in certain Group’s subsidiaries with the carrying value of RUB 2,842 million.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Earnings (loss) per share (EPS)
Basic EPS is calculated by dividing the profit (loss) for the year attributable to common equity holders of the parent by the weighted average number of common shares outstanding during the year.
| 2017 | 2016 | 2015 | ||||||||||
Net profit (loss) from continuing operations | 12,570 | 9,258 | (115,450 | ) | ||||||||
Less: net profit from continuing operations attributable tonon-controlling interests | 1,013 | 1,771 | 458 | |||||||||
|
|
|
|
|
| |||||||
Net income (loss) attributable to common equity shareholders of Mechel PAO from continuing operations | 11,557 | 7,487 | (115,908 | ) | ||||||||
|
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|
|
|
| |||||||
Net (loss) profit from discontinued operations | 0 | (426 | ) | 822 | ||||||||
Less: net profit from discontinued operations attributable tonon-controlling interests | 0 | (65 | ) | 77 | ||||||||
|
|
|
|
|
| |||||||
Net profit (loss) attributable to common equity shareholders of Mechel PAO from discontinued operations | 0 | (361 | ) | 745 | ||||||||
|
|
|
|
|
| |||||||
Profit (loss) attributable to common equity holders | 11,557 | 7,126 | (115,163 | ) | ||||||||
|
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| |||||||
There were no dilutive securities issued for the years endedas of December 31, 2017, 20162019, 2018 and 2015.2017.
| 2017 | 2016 | 2015 | ||||||||||
Profit (loss) per share total (Russian rubles per share), including: | 27.76 | 17.12 | (276.65 | ) | ||||||||
— from continuing operations (Russian rubles per share) | 27.76 | 17.99 | (278.44 | ) | ||||||||
— from discontinued operations (Russian rubles per share) | 0 | (0.87 | ) | 1.79 | ||||||||
Other income/expenses |
Administrative and other operating expenses |
General, administrative and other operating expenses are comprised of the following:
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
Wages, salaries and social security costs | 7,769 | 11,654 | 9,382 | 9,116 | 10,482 | 7,769 | ||||||||||||||||||
Office and maintenance expenses | 1,231 | 1,213 | 1,211 | |||||||||||||||||||||
Loss on write-off of non-current assets | 1,103 | 859 | 321 | |||||||||||||||||||||
Depreciation | 728 | 756 | 605 | |||||||||||||||||||||
Fines and penalties related to business contracts | 630 | 391 | 303 | |||||||||||||||||||||
Audit and consulting services | 558 | 941 | 631 | |||||||||||||||||||||
Provision for legal claims, net | 1,995 | 59 | 996 | 146 | 870 | 1,995 | ||||||||||||||||||
Office expenses | 1,211 | 1,397 | 1,333 | |||||||||||||||||||||
Audit and consulting services | 631 | 569 | 570 | |||||||||||||||||||||
Depreciation | 605 | 716 | 690 | |||||||||||||||||||||
Banking charges and services | 330 | 245 | 271 | |||||||||||||||||||||
Consumables | 308 | 307 | 276 | |||||||||||||||||||||
Social expenses | 406 | 452 | 387 | 303 | 387 | 406 | ||||||||||||||||||
Fines and penalties related to business contracts | 303 | 487 | 236 | |||||||||||||||||||||
Consumables | 276 | 411 | 437 | |||||||||||||||||||||
Banking charges and services | 271 | 268 | 168 | |||||||||||||||||||||
Rent | 165 | 259 | 259 | |||||||||||||||||||||
Business trips | 132 | 136 | 165 | 115 | 139 | 132 | ||||||||||||||||||
Write off of accounts receivable | 109 | 113 | 247 | |||||||||||||||||||||
Loss from disposal of property, plant and equipment | 34 | 57 | 806 | |||||||||||||||||||||
Expense relating to short-term leases (Note 10.6) | 83 | 158 | 165 | |||||||||||||||||||||
Write off of trade and other receivables | 5 | 2 | 109 | |||||||||||||||||||||
Net result from disposal of non-current assets | — | — | 34 | |||||||||||||||||||||
Other | 1,683 | 2,213 | 1,624 | 1,660 | 2,015 | 1,683 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 15,590 | 18,791 | 17,300 | 16,316 | 18,765 | 15,911 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Loss on write-off of non-current assets is represented by the write-down of certain property, plant and equipment items as no future economic benefits are expected from the use or disposal.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Employee benefits expense |
Employee benefits expenses are comprised of the following:
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
Included in cost of sales | ||||||||||||||||||||||||
Wages and salaries | 20,591 | 19,806 | 19,867 | 23,022 | 21,519 | 20,591 | ||||||||||||||||||
Social security costs | 6,438 | 5,909 | 6,181 | 7,485 | 6,887 | 6,438 | ||||||||||||||||||
Post-employment benefits | 142 | 126 | 157 | 210 | 130 | 142 | ||||||||||||||||||
Included in selling and distribution expenses | ||||||||||||||||||||||||
Wages and salaries | 3,686 | 4,029 | 3,966 | 3,882 | 3,784 | 3,686 | ||||||||||||||||||
Social security costs | 973 | 1,015 | 1,024 | 1,052 | 999 | 973 | ||||||||||||||||||
Post-employment benefits | 0 | — | — | |||||||||||||||||||||
Included in administrative and other operating expenses | ||||||||||||||||||||||||
Wages and salaries | 6,259 | 9,510 | 7,631 | 7,206 | 8,444 | 6,259 | ||||||||||||||||||
Social security costs | 1,510 | 2,144 | 1,751 | 1,910 | 2,038 | 1,510 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 39,599 | 42,539 | 40,577 | 44,767 | 43,801 | 39,599 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Other operating income |
Other operating income is comprised of the following:
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
Income from fines and penalties related to business contracts | 160 | 248 | 307 | |||||||||||||||||||||
Net result from disposal of non-current assets | 27 | 128 | — | |||||||||||||||||||||
Curtailment and result of remeasurement of pension obligations | 25 | 93 | 175 | |||||||||||||||||||||
Gain from sales of scrap materials | — | 378 | 226 | |||||||||||||||||||||
Subsidies received from the governmental authorities as a compensation for operating activities (energy tariffs) | 496 | — | — | — | 359 | 496 | ||||||||||||||||||
Income from fines and penalties related to business contracts | 307 | 248 | — | |||||||||||||||||||||
Gain from sales of scrap materials | 226 | 190 | 184 | |||||||||||||||||||||
Curtailment and remeasurement of pension obligations | 175 | 392 | 142 | |||||||||||||||||||||
Revision in estimated cash flows of rehabilitation provision | 0 | 375 | 47 | |||||||||||||||||||||
Insurance compensation | 0 | 153 | — | |||||||||||||||||||||
Other operating income | 183 | 495 | — | |||||||||||||||||||||
Other | 533 | 505 | 183 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 1,387 | 1,853 | 373 | 745 | 1,711 | 1,387 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
In 2019, 2018 and 2017, the Group recognizedrecognised gain on remeasurement of pension obligations because of changingthe changes in the actuarial assumptions, fluctuation in payment amounts from year to year, adjustment in the financial support amount per one pensioner. In 2016, the Group recognized curtailment gain on cancellation
| 24.4 | Finance income and finance costs |
Finance income is comprised of the certain pension programs for workers of Yakutugol, Mechel-Remservice OOO.following:
Revision in estimated cash flows of rehabilitation provision relates primarily to changes in the discount rate, in the planned volumes of works and change in costs of rehabilitation expenses.
| 2019 | 2018 | 2017 | ||||||||||
Effect of restructuring of loans and leases | 362 | 33,514 | 264 | |||||||||
Interest income on other financial assets | 180 | 207 | 158 | |||||||||
Income from the discounting of financial instruments | 58 | 15 | 14 | |||||||||
Remeasurement of fair value of financial instruments (Note 10.5) | — | 320 | 197 | |||||||||
|
|
|
|
|
| |||||||
Total | 600 | 34,056 | 633 | |||||||||
|
|
|
|
|
| |||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Finance income is comprisedEffect of the following:
| 2017 | 2016 | 2015 | ||||||||||
Waiving of fines and penalties on loans and finance leases | 264 | 992 | — | |||||||||
Interest income from investments | 158 | 177 | 134 | |||||||||
Remeasurement of fair value of financial instruments (Note 11.5) | 197 | — | — | |||||||||
Income from the discounting of financial instruments | 14 | 7 | 49 | |||||||||
|
|
|
|
|
| |||||||
Total | 633 | 1,176 | 183 | |||||||||
|
|
|
|
|
| |||||||
Waivingrestructuring of loans and leases in 2019 mainly include waiving of fines and penalties on loansleases with Gazprombank Leasing and finance leases were recognised dueCat Financial, in 2018, primarily relates to VTB (Note 10.1 (b)), Gazprombank (Note 10.1 (c)) and the debt restructuring primarily with Sberbank.refinancing of the pre-export credit facility (Note 10.1 (a)).
Finance costs are comprised of the following:
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
Interest on loans and borrowings | (40,298 | ) | (44,164 | ) | (38,664 | ) | 31,750 | 35,556 | 40,298 | |||||||||||||||
Interest expense on lease liabilities | 1,409 | 1,104 | 1,230 | |||||||||||||||||||||
Fines and penalties on overdue loans and borrowing payments and overdue interest payments | (1,086 | ) | (5,538 | ) | (18,525 | ) | 733 | 858 | 1,086 | |||||||||||||||
Finance charges payable under finance leases | (1,230 | ) | (1,500 | ) | (1,673 | ) | ||||||||||||||||||
Fines and penalties on overdue finance leases | (75 | ) | (475 | ) | (642 | ) | ||||||||||||||||||
Fines and penalties on overdue leases | 49 | 10 | 75 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total finance costs related to loans, borrowings and | (42,689 | ) | (51,677 | ) | (59,504 | ) | ||||||||||||||||||
Total finance costs related to loans, borrowings and leases | 33,941 | 37,528 | 42,689 | |||||||||||||||||||||
Expenses related to discounting of financial instruments | 4,251 | 3,916 | 4,179 | |||||||||||||||||||||
Unwinding of discount on rehabilitation provision | 345 | 302 | 311 | |||||||||||||||||||||
Interest expenses under pension liabilities | (314 | ) | (368 | ) | (400 | ) | 293 | 279 | 314 | |||||||||||||||
Expenses related to discounting of financial instruments | (4,179 | ) | (1,956 | ) | (175 | ) | ||||||||||||||||||
Remeasurement of fair value of financial instruments(Note 11.5) | (117 | ) | — | — | ||||||||||||||||||||
Unwinding of discount on provisions | (311 | ) | (239 | ) | (373 | ) | ||||||||||||||||||
Remeasurement of fair value of the call option (Note 10.5) | — | 27 | 117 | |||||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | (47,610 | ) | (54,240 | ) | (60,452 | ) | �� | 38,830 | 42,052 | 47,610 | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
The interest on loans and borrowings includes fines and penalties on overdue loans and borrowing payments and overdue interest payments of RUB 1,086 million, RUB 5,538 million and RUB 18,525 million for 2017, 2016 and 2015, respectively. The finance charges payable under finance leases include fines and penalties on overdue finance lease payments of RUB 75 million, RUB 475 million and RUB 642 million for 2017, 2016 and 2015, respectively. Expenses related to discounting of financial instruments include changes in the measurement of thenon-current obligation related toput-option granted onnon-controlling interests in the amount of RUB 4,0624,145 million (2016:(2018: RUB 1,8983,796 million, 2017: RUB 4,062 million) (Note 6 and Note 11.4)10.4).
| 24.5 | Other income and other expenses |
Other income is comprised of the following:
| 2019 | 2018 | 2017 | ||||||||||
Write-off of trade and other payables with expired legal term | 167 | 425 | 516 | |||||||||
Gain on royalty and other proceeds associated with disposal of Bluestone | — | 3 | 474 | |||||||||
Gain on final settlements from subsidiaries’ disposal occurred in previous years | — | 3 | — | |||||||||
Gain on forgiveness and restructuring of trade and other payables | — | — | 447 | |||||||||
Other income | 72 | 81 | 58 | |||||||||
|
|
|
|
|
| |||||||
Total | 239 | 512 | 1,495 | |||||||||
|
|
|
|
|
| |||||||
Other expenses are comprised of the following:
| 2019 | 2018 | 2017 | ||||||||||
Loss on sales and purchases of foreign currencies | 148 | 108 | 114 | |||||||||
Other expenses | 356 | 206 | 106 | |||||||||
|
|
|
|
|
| |||||||
Total | 504 | 314 | 220 | |||||||||
|
|
|
|
|
| |||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
Other income is comprisedWrite-off of the following:
| 2017 | 2016 | 2015 | ||||||||||
Gain on accounts payable with expired legal term | 516 | 115 | 222 | |||||||||
Gain on royalty and other proceeds associated with disposal of Bluestone | 474 | 121 | — | |||||||||
Gain on accounts payable forgiveness and restructuring | 447 | — | — | |||||||||
Dividends received | 0 | 3 | 8 | |||||||||
Gain on sale of investments in equity securities | 2 | — | — | |||||||||
Gain on final settlements from subsidiaries’ disposal occurred in previous years | 0 | 194 | — | |||||||||
Other income | 56 | 165 | 112 | |||||||||
|
|
|
|
|
| |||||||
Total | 1,495 | 598 | 342 | |||||||||
|
|
|
|
|
| |||||||
Other expenses are comprised of the following:
| 2017 | 2016 | 2015 | ||||||||||
Loss on sales and purchases of foreign currencies | (114 | ) | (130 | ) | (273 | ) | ||||||
VEB commissions write off | 0 | (1,411 | ) | — | ||||||||
Provision onnon-recoverable advances to pension funds | 0 | (408 | ) | — | ||||||||
Loss on sale of investments in equity securities | 0 | (8 | ) | — | ||||||||
Loss from disposal of subsidiaries | 0 | — | (19 | ) | ||||||||
Other expenses | (106 | ) | (46 | ) | (55 | ) | ||||||
|
|
|
|
|
| |||||||
Total | (220 | ) | (2,003 | ) | (347 | ) | ||||||
|
|
|
|
|
| |||||||
Gain on accounts payabletrade and other payables with expired legal term constitutes gain on thewrite-off of payable amounts that werewritten-off due to legal liquidation of the creditors or expiration of the statute of limitation.
The upfront fee in the amount of RUB 1,411 million paid in 2014 to VEB for the opening of the credit line was written off in 2016 due to uncertainty in further financing.
Segment information |
The Group’s operations are presented in three business segments as follows:
Steel segment, comprising production and sales of semi-finished steel products, carbon and specialty long products, carbon and stainless flat products, value-added downstream metal products, including forgings, stampings, hardware, rails, balks and ferrosilicon;
Mining segment, comprising production and sales of coal (coking and steam) and middlings, coke and chemical products, and iron ore concentrate, which supplies raw materials to the Steel and Power segments and also sells substantial amounts of raw materials to third parties;
Power segment, comprising generation and sales of electricity and heat power, which supplies electricity and heat power to the Steel and Mining segments and also sells a portion of electricity and heat power to third parties.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
These segments are combinations of subsidiaries and have separate management teams and offer different products and services.
The above three segments meet criteria for reportable segments. No operating segments have been aggregated to form the above reportable operating segments. Subsidiaries are consolidated by the segment to which they belong based on their products and by which they are managed. The Group’s management evaluates performance of the segments based on segment revenues, gross margin, and operating income (loss)., assets and liabilities. Transfer prices between operating segments are on anarm’s-length basis in a manner similar to transactions with third parties. The accounting policies used by the Group in reporting segments internally are the same as those used for preparation of consolidated financial statement and in the respective quantitative and qualitative notes ofIncome tax, deferred tax related to the consolidated financial statements therefore no reconciliation between segment informationgroup of taxpayers and consolidatedcertain other assets and liabilities and operating results is performed.are not allocated to those segments as they are managed on the group basis.
As of December 31, 2017 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||
Revenues from external customers | 100,129 | 172,760 | 26,224 | 0 | 299,113 | |||||||||||||||
Inter-segment revenues | 42,286 | 7,622 | 16,338 | (66,246 | ) | 0 | ||||||||||||||
Gross profit | 93,464 | 34,013 | 12,724 | (1,444 | ) | 138,757 | ||||||||||||||
Gross margin, % | 65.6 | 18.9 | 29.9 | 0 | 46.4 | |||||||||||||||
Depreciation and depletion | (7,979 | ) | (5,800 | ) | (448 | ) | 0 | (14,227 | ) | |||||||||||
Loss onwrite-off ofnon-current assets | (135 | ) | (145 | ) | (41 | ) | 0 | (321 | ) | |||||||||||
Impairment of goodwill andnon-current assets | (3,800 | ) | (2,281 | ) | 0 | 0 | (6,081 | ) | ||||||||||||
Operating profit | 48,190 | 9,154 | 1,267 | (1,444 | ) | 57,167 | ||||||||||||||
Share of profit (loss) of associates, net | 18 | 0 | 0 | 0 | 18 | |||||||||||||||
Finance income | 475 | 150 | 8 | 0 | 633 | |||||||||||||||
Intersegment finance income | 1,335 | 567 | 49 | (1,951 | ) | 0 | ||||||||||||||
Finance cost | (34,324 | ) | (12,793 | ) | (493 | ) | 0 | (47,610 | ) | |||||||||||
Intersegment finance cost | (222 | ) | (1,342 | ) | (387 | ) | 1,951 | 0 | ||||||||||||
Income tax expense | (2,023 | ) | (800 | ) | (327 | ) | 0 | (3,150 | ) | |||||||||||
Profit (loss) for the year | 18,596 | (4,712 | ) | 130 | (1,444 | ) | 12,570 | |||||||||||||
Segment assets | 208,585 | 100,128 | 10,414 | 0 | 319,127 | |||||||||||||||
Segment liabilities | 368,283 | 185,074 | 9,903 | 0 | 563,260 | |||||||||||||||
Investments in associates | 283 | 0 | 0 | 0 | 283 | |||||||||||||||
Goodwill | 14,367 | 556 | 3,408 | 0 | 18,331 | |||||||||||||||
Capital expenditures | (5,852 | ) | (1,329 | ) | (321 | ) | 0 | (7,502 | ) | |||||||||||
As of December 31, 2016 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||
Revenues from external customers | 89,647 | 161,639 | 24,723 | — | 276,009 | |||||||||||||||
Inter-segment revenues | 31,907 | 7,254 | 15,903 | (55,064 | ) | — | ||||||||||||||
Gross profit | 76,515 | 42,148 | 11,578 | (554 | ) | 129,687 | ||||||||||||||
Gross margin, % | 62.9 | 25.0 | 28.5 | — | 47.0 | |||||||||||||||
Depreciation and depletion | (7,912 | ) | (5,435 | ) | (367 | ) | — | (13,714 | ) | |||||||||||
Loss onwrite-off ofnon-current assets | (863 | ) | (1,089 | ) | (1 | ) | — | (1,953 | ) | |||||||||||
Impairment of goodwill andnon-current assets | (1,336 | ) | (3,866 | ) | — | — | (5,202 | ) | ||||||||||||
As of December 31, 2019 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||
Revenue from contracts with external customers | 92,996 | 174,850 | 28,721 | — | 296,567 | |||||||||||||||
Inter-segment revenue | 37,710 | 6,107 | 15,606 | (59,423 | ) | — | ||||||||||||||
Gross profit | 68,152 | 27,525 | 13,190 | (157 | ) | 108,710 | ||||||||||||||
Gross margin, % | 52.1 | 15.2 | 29.8 | — | 36.7 | |||||||||||||||
Depreciation and amortisation | (8,541 | ) | (6,153 | ) | (482 | ) | — | (15,176 | ) | |||||||||||
Impairment of goodwill and other non-current assets, net | (3,688 | ) | 1,884 | — | — | (1,804 | ) | |||||||||||||
Operating profit | 23,902 | 7,126 | 1,548 | (1,078 | ) | 31,498 | ||||||||||||||
Share of profit of associates, net | 28 | — | — | — | 28 | |||||||||||||||
Finance income | 524 | 75 | 1 | — | 600 | |||||||||||||||
Intersegment finance income | 386 | 375 | 30 | (791 | ) | — | ||||||||||||||
Finance cost | (23,934 | ) | (14,514 | ) | (382 | ) | — | (38,830 | ) | |||||||||||
Intersegment finance cost | (195 | ) | (325 | ) | (271 | ) | 791 | — | ||||||||||||
Income tax expense | (94 | ) | (503 | ) | (333 | ) | (7,057 | ) | (7,987 | ) | ||||||||||
Profit for the year | 4,955 | 6,934 | 531 | (8,135 | ) | 4,285 | ||||||||||||||
Segment assets | 202,423 | 100,493 | 7,610 | 1,979 | 312,505 | |||||||||||||||
Segment liabilities | 300,058 | 233,279 | 9,432 | 3,333 | 546,102 | |||||||||||||||
Investments in associates | 321 | — | — | — | 321 | |||||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
As of December 31, 2016 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||||||||||||||||||||||
Operating profit | 31,012 | 11,531 | 701 | (554 | ) | 42,690 | ||||||||||||||||||||||||||||||||||
Share of profit (loss) of associates, net | (17 | ) | — | — | — | (17 | ) | |||||||||||||||||||||||||||||||||
As of December 31, 2018 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||||||||||||||||||||||
Revenue from contracts with external customers | 96,882 | 187,918 | 27,774 | — | 312,574 | |||||||||||||||||||||||||||||||||||
Inter-segment revenue | 37,549 | 5,865 | 15,471 | (58,885 | ) | — | ||||||||||||||||||||||||||||||||||
Gross profit | 77,199 | 44,433 | 12,571 | 615 | 134,818 | |||||||||||||||||||||||||||||||||||
Gross margin, % | 57.4 | 22.9 | 29.1 | — | 43.1 | |||||||||||||||||||||||||||||||||||
Depreciation and amortisation | (7,621 | ) | (5,738 | ) | (500 | ) | — | (13,859 | ) | |||||||||||||||||||||||||||||||
Impairment of goodwill and other non-current assets, net | (3,684 | ) | (819 | ) | (2,719 | ) | — | (7,222 | ) | |||||||||||||||||||||||||||||||
Operating profit (loss) | 32,574 | 19,831 | (3,240 | ) | 615 | 49,780 | ||||||||||||||||||||||||||||||||||
Share of profit of associates, net | 10 | — | — | — | 10 | |||||||||||||||||||||||||||||||||||
Finance income | 1,082 | 93 | 1 | — | 1,176 | 23,387 | 9,478 | 1,191 | — | 34,056 | ||||||||||||||||||||||||||||||
Intersegment finance income | 1,401 | 2,141 | 53 | (3,595 | ) | — | 1,071 | 395 | 41 | (1,507 | ) | — | ||||||||||||||||||||||||||||
Finance cost | (37,615 | ) | (16,015 | ) | (610 | ) | — | (54,240 | ) | (28,932 | ) | (12,810 | ) | (310 | ) | — | (42,052 | ) | ||||||||||||||||||||||
Intersegment finance cost | (1,731 | ) | (1,396 | ) | (468 | ) | 3,595 | — | (220 | ) | (1,015 | ) | (272 | ) | 1,507 | — | ||||||||||||||||||||||||
Loss after tax for the year from discontinued operations, net | — | (406 | ) | (20 | ) | — | (426 | ) | ||||||||||||||||||||||||||||||||
Income tax (expense) benefit | (5,019 | ) | 265 | (139 | ) | — | (4,893 | ) | (5,940 | ) | 531 | 83 | 2,645 | (2,681 | ) | |||||||||||||||||||||||||
Profit (loss) for the year | 2,309 | 7,455 | (378 | ) | (554 | ) | 8,832 | 11,489 | 1,331 | (2,544 | ) | 3,260 | 13,536 | |||||||||||||||||||||||||||
Segment assets | 210,028 | 104,550 | 10,887 | — | 325,465 | 208,123 | 97,373 | 7,519 | 4,610 | 317,625 | ||||||||||||||||||||||||||||||
Segment liabilities | 375,938 | 191,058 | 11,057 | — | 578,053 | 296,125 | 247,241 | 9,469 | (2,015 | ) | 550,820 | |||||||||||||||||||||||||||||
Investments in associates | 265 | — | — | — | 265 | 293 | — | — | — | 293 | ||||||||||||||||||||||||||||||
Goodwill | 14,367 | 580 | 3,408 | — | 18,355 | |||||||||||||||||||||||||||||||||||
Capital expenditures | (3,958 | ) | (1,206 | ) | (360 | ) | — | (5,524 | ) | |||||||||||||||||||||||||||||||
As of December 31, 2015 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||||||||||||||||||||||
Revenues from external customers | 80,632 | 146,032 | 26,477 | — | 253,141 | |||||||||||||||||||||||||||||||||||
Inter-segment revenues | 28,091 | 6,972 | 14,990 | (50,053 | ) | — | ||||||||||||||||||||||||||||||||||
As of December 31, 2017 and for the year then ended | Mining | Steel | Power | Adjustments and eliminations | Consolidated | |||||||||||||||||||||||||||||||||||
Revenue from contracts with external customers | 100,129 | 172,760 | 26,224 | — | 299,113 | |||||||||||||||||||||||||||||||||||
Inter-segment revenue | 42,286 | 7,622 | 16,338 | (66,246 | ) | — | ||||||||||||||||||||||||||||||||||
Gross profit | 57,442 | 33,395 | 11,288 | (318 | ) | 101,807 | 93,464 | 34,013 | 12,724 | (1,444 | ) | 138,757 | ||||||||||||||||||||||||||||
Gross margin, % | 52.8 | 21.8 | 27.2 | — | 40.2 | 65.6 | 18.9 | 29.9 | — | 46.4 | ||||||||||||||||||||||||||||||
Depreciation and depletion | (9,106 | ) | (4,651 | ) | (328 | ) | — | (14,085 | ) | |||||||||||||||||||||||||||||||
Loss onwrite-off ofnon-current assets | (199 | ) | (492 | ) | — | — | (691 | ) | ||||||||||||||||||||||||||||||||
Impairment of goodwill andnon-current assets | — | (16 | ) | (1,444 | ) | — | (1,460 | ) | ||||||||||||||||||||||||||||||||
Depreciation and amortisation | (7,979 | ) | (5,800 | ) | (448 | ) | — | (14,227 | ) | |||||||||||||||||||||||||||||||
Impairment of goodwill and other non-current assets, net | (3,800 | ) | (2,281 | ) | — | — | (6,081 | ) | ||||||||||||||||||||||||||||||||
Operating profit | 16,004 | 8,527 | 39 | (318 | ) | 24,252 | 48,190 | 9,154 | 1,267 | (1,444 | ) | 57,167 | ||||||||||||||||||||||||||||
Share of profit of associates, net | 18 | — | — | — | 18 | |||||||||||||||||||||||||||||||||||
Finance income | 142 | 38 | 3 | — | 183 | 475 | 150 | 8 | — | 633 | ||||||||||||||||||||||||||||||
Intersegment finance income | 887 | 307 | 53 | (1,247 | ) | — | 1,335 | 567 | 49 | (1,951 | ) | — | ||||||||||||||||||||||||||||
Finance cost | (33,656 | ) | (24,767 | ) | (2,029 | ) | — | (60,452 | ) | (34,324 | ) | (12,793 | ) | (493 | ) | — | (47,610 | ) | ||||||||||||||||||||||
Intersegment finance cost | (225 | ) | (878 | ) | (144 | ) | 1,247 | — | (222 | ) | (1,342 | ) | (387 | ) | 1,951 | — | ||||||||||||||||||||||||
Profit (loss) after tax for the year from discontinued operations, net | 764 | 87 | (29 | ) | — | 822 | ||||||||||||||||||||||||||||||||||
Income tax (expense) benefit | (5,630 | ) | (2,795 | ) | 103 | — | (8,322 | ) | (3,410 | ) | (203 | ) | (229 | ) | 692 | (3,150 | ) | |||||||||||||||||||||||
Loss for the year | (71,563 | ) | (40,626 | ) | (2,121 | ) | (318 | ) | (114,628 | ) | ||||||||||||||||||||||||||||||
Profit (loss) for the year | 17,210 | (4,116 | ) | 228 | (752 | ) | 12,570 | |||||||||||||||||||||||||||||||||
Segment assets | 217,393 | 113,985 | 10,694 | — | 342,072 | 209,630 | 100,543 | 10,417 | (1,463 | ) | 319,127 | |||||||||||||||||||||||||||||
Segment liabilities | 375,153 | 216,771 | 12,002 | — | 603,926 | 371,196 | 184,952 | 9,808 | (2,696 | ) | 563,260 | |||||||||||||||||||||||||||||
Investments in associates | 284 | — | — | — | 284 | 283 | — | — | — | 283 | ||||||||||||||||||||||||||||||
Goodwill | 14,367 | 3,603 | 3,408 | — | 21,378 | |||||||||||||||||||||||||||||||||||
Capital expenditures | (4,971 | ) | (520 | ) | (486 | ) | — | (5,977 | ) | |||||||||||||||||||||||||||||||
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The following table presents the Group’s revenues from contracts with customers segregated between domestic and export sales. Domestic represents sales by a subsidiary in the country in which it is located. This category is further divided between subsidiaries located in Russia and other countries. Export represents cross-border sales by a subsidiary regardless of its location.
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
Domestic | ||||||||||||||||||||||||
Russia | 176,906 | 164,361 | 146,701 | 171,215 | 178,880 | 176,906 | ||||||||||||||||||
Other | 23,445 | 22,252 | 20,817 | 28,469 | 29,666 | 23,445 | ||||||||||||||||||
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|
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| |||||||||||||||||||
Total | 200,351 | 186,613 | 167,518 | 199,684 | 208,546 | 200,351 | ||||||||||||||||||
Export | 98,762 | 89,396 | 85,623 | 96,883 | 104,028 | 98,762 | ||||||||||||||||||
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|
|
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| |||||||||||||||||||
Total revenue | 299,113 | 276,009 | 253,141 | 296,567 | 312,574 | 299,113 | ||||||||||||||||||
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Allocation of total revenue from contracts with customers by country is based on the location of the customer. The Group’s total revenuesrevenue from external customers by geographic area were as follows:
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
Russia | 177,005 | 164,412 | 146,754 | 171,344 | 178,997 | 177,005 | ||||||||||||||||||
Asia | 63,182 | 54,114 | 40,119 | 63,187 | 61,840 | 63,182 | ||||||||||||||||||
Europe | 36,605 | 34,126 | 39,019 | 38,334 | 44,263 | 36,605 | ||||||||||||||||||
CIS | 19,346 | 18,630 | 20,231 | 21,465 | 23,877 | 19,346 | ||||||||||||||||||
Middle East | 2,212 | 1,536 | 4,222 | 1,983 | 3,130 | 2,212 | ||||||||||||||||||
USA | 286 | 707 | 581 | 155 | 258 | 286 | ||||||||||||||||||
Other regions | 477 | 2,484 | 2,215 | 99 | 209 | 477 | ||||||||||||||||||
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| |||||||||||||||||||
Total | 299,113 | 276,009 | 253,141 | 296,567 | 312,574 | 299,113 | ||||||||||||||||||
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The majority of the Group’snon-current assets are located in Russia. The carrying amounts of mineral licenses and property, plant and equipment pertaining to the Group’s major operations were as follows:
| December 31, 2017 | December 31, 2016 | December 31, 2019 | December 31, 2018 | |||||||||||||
Russia | 228,825 | 238,175 | 225,755 | 219,504 | ||||||||||||
Germany | 1,407 | 1,415 | 1,225 | 1,532 | ||||||||||||
Austria | 589 | 581 | 677 | 637 | ||||||||||||
Czech Republic | 216 | 206 | 237 | 224 | ||||||||||||
Romania | 41 | 40 | ||||||||||||||
Other | 37 | 35 | 173 | 50 | ||||||||||||
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|
| |||||||||||||
Total | 231,115 | 240,452 | 228,067 | 221,947 | ||||||||||||
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| |||||||||||||
Because of the significant number of customers, there are no individual external customers that generate sales greater than 10% of the Group’s consolidated total revenue.revenue from contracts with customers.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 20172019
(All amounts are in millions of Russian rubles, unless stated otherwise)
The following table presents the breakdown of the Group’s revenues from contracts with external customers by major products:
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | |||||||||||||||||||
Mining segment | ||||||||||||||||||||||||
Coal and middlings | 84,341 | 75,258 | 64,186 | 71,970 | 80,022 | 84,341 | ||||||||||||||||||
Coke and chemical products | 13,747 | 11,330 | 11,756 | 17,970 | 14,205 | 13,747 | ||||||||||||||||||
Iron ore concentrate | 220 | 126 | 1,844 | 1,179 | 839 | 220 | ||||||||||||||||||
Other | 1,821 | 2,933 | 2,846 | 1,877 | 1,816 | 1,821 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 100,129 | 89,647 | 80,632 | 92,996 | 96,882 | 100,129 | ||||||||||||||||||
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| |||||||||||||||||||
Steel segment | ||||||||||||||||||||||||
Long steel products | 96,768 | 89,575 | 73,853 | 97,692 | 105,722 | 96,768 | ||||||||||||||||||
Hardware | 27,578 | 24,580 | 23,443 | 27,086 | 30,040 | 27,578 | ||||||||||||||||||
Flat steel products | 22,505 | 18,230 | 17,490 | 23,371 | 22,786 | 22,505 | ||||||||||||||||||
Forgings and stampings | 12,247 | 11,652 | 12,166 | 14,818 | 15,848 | 12,247 | ||||||||||||||||||
Semi-finished steel products | 492 | 3,434 | 5,027 | |||||||||||||||||||||
Ferrosilicon | 2,807 | 3,368 | 3,528 | 3,229 | 3,927 | 2,807 | ||||||||||||||||||
Steel pipes | 2,733 | 3,286 | 3,308 | 3,281 | 3,230 | 2,733 | ||||||||||||||||||
Semi-finished steel products | 137 | 54 | 492 | |||||||||||||||||||||
Other | 7,630 | 7,514 | 7,217 | 5,236 | 6,311 | 7,630 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 172,760 | 161,639 | 146,032 | 174,850 | 187,918 | 172,760 | ||||||||||||||||||
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| |||||||||||||||||||
Power segment | ||||||||||||||||||||||||
Electricity | 24,297 | 22,527 | 24,524 | 26,965 | 26,009 | 24,297 | ||||||||||||||||||
Other | 1,927 | 2,196 | 1,953 | 1,756 | 1,765 | 1,927 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total | 26,224 | 24,723 | 26,477 | 28,721 | 27,774 | 26,224 | ||||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Total revenue | 299,113 | 276,009 | 253,141 | 296,567 | 312,574 | 299,113 | ||||||||||||||||||
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|
|
| |||||||||||||||||||
Commitments
In the course of carrying out its operations and other activities, the Group and its subsidiaries enter into various agreements, which would require the Group to invest in or provide financing to specific projects or undertakings. In management’s opinion, these commitments are entered into under standard terms, which are representative of each specific project’s potential and should not result in an unreasonable loss.
As of December 31, 2017 and 2016, the total Group’s contractual commitments to acquire property, plant and equipment amounted to RUB 19,393 million and RUB 21,932 million, respectively.
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
Operating lease commitments
The Group has entered into operating property and land leases with lease terms between 2018 and 2066. Property and land lease expenses amounted to RUB 1,875 million and RUB 1,829 million for the years ended December 31, 2017 and 2016, respectively. Future minimum rentals payable undernon-cancellable operating leases as of December 31, 2017 are, as follows:
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| ||||
| ||||
| 26. | ||||
| ||||
The Group does not sublease the property leased under operating lease agreements.
Finance lease commitments
The Group has finance leases for various items of plant and machinery. The Group’s obligations under finance leases are not secured. Future minimum lease payments under finance leases together with the present value of the net minimum lease payments were as follows:
| Minimum payments | Present value of payments | |||||||||||||||
| December 31, 2017 | December 31, 2016 | December 31, 2017 | December 31, 2016 | |||||||||||||
Payable in 1 year | 8,700 | 12,312 | 7,476 | 10,175 | ||||||||||||
Payable in 2 years | 633 | 280 | 457 | 225 | ||||||||||||
Payable in 3 years | 584 | 106 | 458 | 74 | ||||||||||||
Payable in 4 years | 557 | 83 | 481 | 64 | ||||||||||||
Payable in 5 years and thereafter | 526 | 61 | 482 | 58 | ||||||||||||
|
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|
|
|
|
|
| |||||||||
Total minimum lease payment | 11,000 | 12,842 | 9,354 | 10,596 | ||||||||||||
Less amounts representing finance charges | (1,646 | ) | (2,246 | ) | 0 | — | ||||||||||
|
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|
|
|
|
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| |||||||||
Present value of finance lease liabilities | 9,354 | 10,596 | 9,354 | 10,596 | ||||||||||||
|
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|
|
|
|
| |||||||||
Current portion of finance lease liabilities | 7,476 | 10,175 | ||||||||||||||
Non-current portion of finance lease liabilities | 1,878 | 421 | ||||||||||||||
The discount rate used for the calculation of the present value of minimum lease payments equals the implicit rate for the lessor and varies on different groups of equipment from 7.2% p.a. to 11.4% p.a. (U.S. dollar-denominated contracts), from 9.4% p.a. to 18.2% p.a. (euro-denominated contracts) and from 9.1% p.a. to 31.8% p.a. (Russian ruble-denominated contracts). Interest expense charged to the consolidated statements of profit (loss) and other comprehensive income (loss) in 2017 and 2016 amounted to RUB 1,230 million and RUB 1,500 million, respectively.
The Group’s finance lease contracts contain a number of covenants and restrictions, which include, but are not limited to, compliance with payment schedule and certain cross-default provisions. As of December 31, 2017 and 2016, the Group was not in compliance with major Group’s restrictive covenants. There was also a breach of
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
restrictive covenants on overdue principal amount of RUB 158 million and RUB 417 million as of December 31, 2017 and 2016, respectively. As a result, the long-term finance lease liability of RUB 3,898 million and RUB 6,903 million was reclassified to short-term finance lease liabilities due to covenant violations as of December 31, 2017 and 2016, respectively.
The total amount of commitments under the signed lease contracts as of December 31, 2017 and 2016 is equal to RUB 75 million and RUB 103 million, respectively.
Contingencies
Legal claim contingency
The Group is involved in a number of court proceedings and claims arising out of the normal course of its business which are monitored, assessed and contested on the ongoing basis. Where management believes that a lawsuit or another claim would result in the outflow of the economic benefits for the Group, a best estimate of such outflow is included in provisions in the consolidated financial statements (Note 23). As of December 31, 2017, management assesses the outcome of several court proceedings and claims where the Group’s companies act as defendants in the aggregate amount of RUB 15,959 million (primarily associated with the metallurgical plants as defined Note 9(b)) as possible based on the carefully processed analysis and strong arguments provided by legal advisers. In February 2018, the Group successfully sustained its position in the first court instance for the amount of RUB 12,700 million.
Environmental
In the course of the Group’s operations, the Group may be subject to environmental claims and legal proceedings. The quantification of environmental exposures requires an assessment of many factors, including changing laws and regulations, improvements in environmental technologies, the quality of information available related to specific sites, the assessment stage of each site investigation, preliminary findings and the length of time involved in remediation or settlement. Management does not believe that any pending environmental claims or proceedings will have a material adverse effect on the Group’s financial position and results of operations.
The Group estimated the total amount of capital investments to address environmental concerns at its various subsidiaries at RUB 598 million and RUB 647 million as of December 31, 2017 and 2016, respectively. These amounts are not accrued in the consolidated financial statements until actual capital investments are made.
Possible liabilities, which were identified by management as those that can be subject to potential claims from environmental authorities are not accrued in the consolidated financial statements. The amount of such liabilities was not significant.
Taxation
The Group is subject to taxation to the largest extent in Russia, and secondarily in other jurisdictions. The Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Russian tax authorities take assertive position in its interpretation of the legislation and assessments and as a result, it is possible that transactions and activities that have not been challenged in the past may be challenged. As such, significant additional taxes,
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of the taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. The fact that a year has been reviewed does not close that year, or any tax declaration applicable to that year, from further review during thethree-year period.
In the event that a taxpayer submits a revised tax declaration in which the stated amount of tax is less than the amount previously declared, tax audit of a taxpayer may be performed, but only with the respect to the changes in the tax declaration.
In other tax jurisdictions where the Group conducts operations or holds shares, taxes are generally charged on the income arising in that jurisdiction. In the most jurisdictions agreements to avoid double taxation were signed with other jurisdictions; however, the risk of additional taxation exists, especially in respect of certain domiciles where some of the Group entities are located.
The Russian transfer pricing legislation, which came into force on January 1, 2012, allows the Russian tax authority to apply transfer pricing adjustments and impose additional profits tax liabilities in respect of all “controlled” transactions if the transaction price differs from the market level of prices. The list of “controlled” transactions includes transactions performed with related parties and certain types of cross-border transactions. For domestic transactions the transfer pricing rules apply only if the amount of all transaction with related party exceeds RUB 1,000 million since 2014.
In order to support the level of prices applied for the “controlled” transactions the Group should provide evidence that prices of “controlled” transactions are based on market prices and to prepare the reports for submission to the Russian tax authorities. Otherwise, the Russian tax authorities have the right to challenge the prices determined by the Group for such transactions and to charge additional taxes, penalties and fines. In cases where the domestic transaction resulted in an accrual of additional tax liabilities for one party, another party could correspondingly adjust its profit tax liabilities according to the special notification issued by the authorized body in due course. Special transfer pricing rules apply to transactions with securities and derivatives.
Due to the uncertainty and absence of current practice of application of the current Russian transfer pricing legislation the Russian tax authorities may challenge the level of prices applied by the Group under the “controlled” transactions and accrue additional tax liabilities unless the Group is able to demonstrate the use of market prices with respect to the “controlled” transactions, and that there has been proper reporting to the Russian tax authorities, supported by appropriate available transfer pricing documentation.
The Group believes that it uses the market prices in “controlled” transactions and does not expect any claims of tax authorities related to the prices used in such transactions. However, due to the uncertainty and limited practice of the Russian legislation in the area of transfer pricing relevant tax claims may be raised and the respective effect is currently impossible to estimate.
In addition, in November 2014, the legislation of the Russian Federation has been significantly revised in order to prevent the misuse oflow-tax jurisdictions for tax avoidance in the Russian Federation. Changes in the legislation set out the rules for the taxation of income of a foreign organization recognized as a controlled foreign corporation. The foreign organization is recognized as a controlled foreign corporation, if it is not a tax resident of the Russian Federation and the share of the controlling Russian entities or individuals in the organization is more than 25%. The transition period provides for a gradual reduction in the amount ofnon-taxable income of the controlled corporation RUB 50 million, RUB 30 million and RUB 10 million for 2015, 2016, 2017 and
MECHEL PAO
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for the year ended December 31, 2017
(All amounts are in millions of Russian rubles, unless stated otherwise)
further respectively. The Russian tax law also provides for certain conditions under which the income of controlled corporations qualifies as tax exempt. Starting 2016, the taxable income of the controlling party is increased by the profits of the controlled foreign corporation earned in the financial year ended prior to the reporting year.
Management believes that it has paid or accrued all taxes that are applicable. Where uncertainty exists, the Group has accrued tax liabilities based on management’s best estimate of the probable outflow of resources embodying economic benefits, which will be required to settle these liabilities. In accordance with IAS 37Provisions, Contingent Liabilities and Contingent Assets, the Group recorded RUB 576 million and RUB 760 million of other tax claims that management believes are probable, as of December 31, 2017 and 2016, respectively. In addition, income tax accrual was made under IAS 12Income Taxes (Note 20). The Group does not believe that any other material tax matters exist relating to the Group, including current pending or future governmental claims and demands, which would require adjustment to the accompanying consolidated financial statements in order for those statements not to be materially misstated or misleading as of December 31, 2017.
Possible tax liabilities on taxes other than income tax, which were identified by management as those that can be subject to different interpretations of the tax law and regulations are not accrued in the consolidated financial statements. The amount of such liabilities was RUB 1,354 million and 976 as of December 31, 2017 and 2016, respectively.
| Events after the reporting period |
The Group evaluated subsequent events from December 31, 20172019 through the date the consolidated financial statements were issued and concluded that no subsequent events have occurred that would require recognition or disclosure in the consolidated financial statements.statements other than discussed below and disclosed in Note 4 and Note 10.4.
Since January 2020, the Russian government implemented preventive measures to curb the spread of coronavirus (COVID-19) in the country by imposing quarantines, carrying raids on potential virus carriers and using facial recognition to impose quarantine measures. The extent to which the coronavirus impacts the Group’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.
F-103F-100