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MTL Mechel PJSC

Filed: 18 Mar 21, 4:14pm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 20-F

 

 

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-32328

 

 

MECHEL PAO

(Exact name of Registrant as specified in its charter)

 

 

RUSSIAN FEDERATION

(Jurisdiction of incorporation or organization)

Krasnoarmeyskaya Street 1, Moscow 125167, Russian Federation

(Address of principal executive offices)

Alexey Lukashov, tel.: +7-495-221-8888, e-mail: alexey.lukashov@mechel.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol(s)

 

Name of Each Exchange on Which  Registered

COMMON AMERICAN DEPOSITARY SHARES, EACH COMMON
ADS REPRESENTING TWO COMMON SHARES
 MTL NEW YORK STOCK EXCHANGE

COMMON SHARES, PAR VALUE

10 RUSSIAN RUBLES PER SHARE

  NEW YORK STOCK EXCHANGE(1)

PREFERRED AMERICAN DEPOSITARY SHARES, EACH PREFERRED ADS

REPRESENTING ONE-HALF OF A PREFERRED SHARE

 MTL PR NEW YORK STOCK EXCHANGE

PREFERRED SHARES, PAR VALUE

10 RUSSIAN RUBLES PER SHARE

  NEW YORK STOCK EXCHANGE(2)

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

416,270,745 common shares, of which 52,116,174 shares are in the form of common ADSs

138,756,915 preferred shares (including 54,793,636 shares held by Skyblock Limited, a wholly-owned subsidiary of Mechel PAO), of which 10,626,874 shares are in the form of preferred ADSs

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ☐    No   ☒

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes   ☐    No   ☒

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒    No   ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ☒    No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ☐ Accelerated filer   ☒  Non-accelerated filer   ☐ Emerging growth company   ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP   ☐

  

International Financial Reporting Standards as issued by
the International Accounting Standards Board   ☒

   Other   ☐ 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17   ☐    Item 18   ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐    No   ☒

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    Yes   ☐    No   ☐

 

 

(1)

Listed, not for trading or quotation purposes, but only in connection with the registration of common ADSs pursuant to the requirements of the Securities and Exchange Commission.

(2)

Listed, not for trading or quotation purposes, but only in connection with the registration of preferred ADSs pursuant to the requirements of the Securities and Exchange Commission.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

  6

Item 1.

 Identity of Directors, Senior Management and Advisers  7

Item 2.

 Offer Statistics and Expected Timetable  7

Item 3.

 Key Information  7

Item 4.

 Information on the Company  60

Item 4A.

 Unresolved Staff Comments  125

Item 5.

 Operating and Financial Review and Prospects  126

Item 6.

 Directors, Senior Management and Employees  173

Item 7.

 Major Shareholders and Related Party Transactions  182

Item 8.

 Financial Information  184

Item 9.

 The Offer and Listing  188

Item 10.

 Additional Information  188

Item 11.

 Quantitative and Qualitative Disclosures about Market Risk  223

Item 12.

 Description of Securities Other than Equity Securities  224

Item 13.

 Defaults, Dividend Arrearages and Delinquencies  227

Item 14.

 Material Modifications to the Rights of Security Holders and Use of Proceeds  228

Item 15.

 Controls and Procedures  228

Item 16A.

 Audit Committee Financial Expert  230

Item 16B.

 Code of Ethics  230

Item 16C.

 Principal Accountant Fees and Services  231

Item 16D.

 Exemptions from the Listing Standards for Audit Committees  231

Item 16E.

 Purchases of Equity Securities by the Issuer and Affiliated Purchasers  232

Item 16F.

 Change in Registrant’s Certifying Accountant  232

Item 16G.

 Corporate Governance  233

Item 17.

 Financial Statements  234

Item 18.

 Financial Statements  234

Item 19.

 Exhibits  235

SIGNATURES

  237

 

 

Unless the context otherwise requires, references to “Mechel” refer to Mechel PAO, and references to “Mechel group,” “the group,” “our group,” “we,” “us” or “our” refer to Mechel PAO together with its subsidiaries.

Our business consists of three segments: mining, steel and power. References in this document to segment revenues are to revenues of the segment excluding intersegment sales, unless otherwise noted. References in this document to our sales or our total sales are to third-party sales and do not include intra-group sales, unless otherwise noted.

For the purposes of calculating certain market share data, we have included businesses that are currently part of our group that may not have been part of our group during the period for which such market share data is presented.

The reporting currency of our consolidated financial statements is the Russian ruble. The reason of adopting the Russian ruble as the reporting 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.

 

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References to “Russian rubles,” “rubles” or “RUB” are to the currency of the Russian Federation, references to “U.S. dollars,” “$” or “USD” are to the currency of the United States and references to “euro,” “€” or “EUR” are to the currency of the member states of the European Union that participate in the Economic and Monetary Union.

The term “tonne” as used herein means a metric tonne. A metric tonne is equal to 1,000 kilograms or 2,204.62 pounds.

Certain amounts that appear in this document have been subject to rounding adjustments; accordingly, figures shown as totals in certain tables or in the text may not be an arithmetic aggregation of the figures that precede them.

“CIS” means the Commonwealth of Independent States.

“CBR” refers to the Central Bank of the Russian Federation.

The following table sets forth by business activity the official names and location of our key subsidiaries and their names as used in this document:

 

Name as Used in This Document

 

Official Name

 

Location

Mining

  

Mechel Mining

 Mechel Mining AO Russia, Moscow

Southern Kuzbass Coal Company

 Southern Kuzbass Coal Company PJSC Russia, Kemerovo region

Yakutugol

 Yakutugol Joint-Stock Holding Company Russia, Sakha Republic

Korshunov Mining Plant

 Korshunov Mining Plant PAO Russia, Irkutsk region

Moscow Coke and Gas Plant

 Moscow Coke and Gas Plant JSC Russia, Moscow region

Mechel Coke

 Mechel Coke OOO Russia, Chelyabinsk region

Port Posiet

 Port Posiet JSC Russia, Primorsky Krai

Port Temryuk

 Port Mechel Temryuk OOO Russia, Krasnodar Krai

Steel

  

Chelyabinsk Metallurgical Plant

 Chelyabinsk Metallurgical Plant PAO Russia, Chelyabinsk region

Izhstal

 Izhstal PAO Russia, Republic of Udmurtia

Urals Stampings Plant

 Urals Stampings Plant PAO Russia, Chelyabinsk region

Beloretsk Metallurgical Plant

 Beloretsk Metallurgical Plant AO Russia, Republic of Bashkortostan

Vyartsilya Metal Products Plant

 Vyartsilya Metal Products Plant AO Russia, Republic of Karelia

Mechel Nemunas

 Mechel Nemunas UAB Lithuania, Kaunas

Bratsk Ferroalloy Plant

 Bratsk Ferroalloy Plant OOO Russia, Irkutsk region

Port Kambarka

 Port Kambarka AO Russia, Republic of Udmurtia

Power

  

Southern Kuzbass Power Plant

 Southern Kuzbass Power Plant PAO 

Russia, Kemerovo region

Kuzbass Power Sales Company

 Kuzbass Power Sales Company PAO 

Russia, Kemerovo region

Mechel Energo

 

Mechel Energo OOO

 

Russia, Chelyabinsk region

Marketing and Distribution

  

Mechel Carbon

 Mechel Carbon AG Switzerland, Baar

Mechel Service Global

 Mechel Service Global B.V. Netherlands, the Hague

Mechel Service

 Mechel Service OOO Russia, Moscow

Other

  

Mecheltrans

 Mecheltrans OOO Russia, Moscow

 

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SUMMARY OF RISK FACTORS

An investment in our securities is subject to a number of risks, including risks relating to COVID-19, our financial condition, our business and industry, our shares and ADSs and the trading market and risks relating to the Russian Federation. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.

COVID-19

 

  

Further development of situation with COVID-19 outbreak may result in lower demand for our products, negatively impact our revenues and affect our results of operations.

 

  

COVID-19 quarantine measures, including any import restrictions, may affect our ability to use the logistics infrastructure and deliver our products to the customers.

 

  

COVID-19 outbreak may result in inability of the group to receive goods and services from suppliers that we need for our day-to-day operations.

 

  

Our operations could get disrupted if any of our employees test positive for COVID-19 after returning to office or the production plants, which in turn could have an adverse effect on our ability to continue operations.

 

  

Our internal controls over financial reporting can be affected by the COVID-19 outbreak, which may result in our inability to prevent or detect misstatements.

 

  

With further development of COVID-19, IT infrastructure and resources can become scarcely available to us due to shortage, remote working and limited capacity of existing infrastructure.

Risks Relating to Our Financial Condition

 

  

We have significant debt that we do not have the ability to repay without refinancing or restructuring and there is substantial doubt about our ability to continue as a going concern.

 

  

We have experienced and may continue to experience liquidity shortages and a working capital deficit.

 

  

Our creditors had accelerated and in the future may accelerate amounts due under our loan agreements, which may result in loss of our assets, including fixed assets and shares in our subsidiaries, adversely affect our ability to conduct our business and result in a significant decline in the value of our shares and ADSs.

 

  

We may fail to comply with the terms of the restructured indebtedness or be unable to restructure all of our indebtedness in the future.

 

  

We have a substantial amount of outstanding indebtedness with restrictive financial covenants and most shares and assets in our subsidiaries are pledged.

 

  

We may become subject to bankruptcy procedures, which may result in the inability of holders of our shares and ADSs to recover some or all of their investments.

 

  

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.

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.

 

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The steel and mining industries are highly competitive, and we may not be able to compete successfully.

 

  

Our business is capital intensive, if we are not able to finance our capital investment program this may have a material adverse effect on our business and our ability to comply with applicable regulations.

 

  

Successful implementation of our strategy to expand our coal sales depends on our ability to increase our export sales and further development of transportation infrastructure.

 

  

Changes in our estimates of reserves or failure to implement mine development plans could result in lower than expected revenues, higher than expected costs or decreased operating margins.

 

  

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.

 

  

Increasing energy, raw materials, transportation and labor costs could adversely affect our operating margins.

 

  

We are subject to mining and steelmaking operational risks associated with the exploration, development and production of natural resources, as well as the process of steelmaking, any of which could result in production shortfalls or damage to persons or property.

 

  

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, or require significant capital investment, or even result in the suspension of our operations.

 

  

Failure to comply with existing laws and regulations could result in substantial additional compliance costs or various sanctions which could materially adversely affect our business, financial condition, results of operations and prospects.

 

  

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 entering into transactions on less favorable terms than could be obtained on arm’s length basis.

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 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.

 

  

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 may not be able to benefit from the United States-Russia income tax treaty and capital gains from the sale of ADSs may be subject to withholding tax in Russia.

 

  

Holders of ADSs may have limited recourse against us and our directors and executive officers.

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.

 

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Sanctions, as well as other politically related disagreements and allegations between Russia and other countries, may have a material adverse effect on our business, liquidity and financial condition, as well as value of our shares and ADSs.

 

  

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.

 

  

Weaknesses relating to the Russian legal system and legislation create an uncertain investment climate.

 

  

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.

 

  

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.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Matters discussed in this document may constitute forward-looking statements, as defined in the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “plan,” “project,” “will,” “likely,” “goal,” “future,” “may,” “should” and similar expressions identify forward-looking statements. Forward-looking statements appear in a number of places including, without limitation, “Item 3. Key Information — Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” and include statements regarding:

 

  

strategies, outlook and growth prospects;

 

  

the ability to maintain and generate sufficient cash and other liquid resources to meet our operating and debt service requirements;

 

  

our ability to comply with the covenants and restrictions imposed by the existing and future financing arrangements and our ability to attract new financing or refinancing, as well as to restructure the debt;

 

  

the impact of competition;

 

  

capital expenditures;

 

  

demand for our products;

 

  

economic outlook and industry trends;

 

  

transactions with related parties;

 

  

regulatory compliance;

 

  

developments in our markets;

 

  

future plans and potential for future growth;

 

  

the results of any legal procedures;

 

  

the impact of regulatory initiatives; and

 

  

the strength of our competitors.

The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management’s examination of historical operating trends, data contained in our records and other data available from third parties. Although we believe that these assumptions were reasonable when made, these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, and we may not achieve or accomplish these expectations, beliefs or projections. See “Item 3. Key Information — Risk Factors” for a discussion of important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements.

Except to the extent required by law, neither we, nor any of our agents, employees or advisers intend or have any duty or obligation to supplement, amend, update or revise any of the forward-looking statements contained or incorporated by reference in this document.

 

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PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

Selected Financial Data

The financial data set forth below as of December 31, 2020, 2019, 2018, 2017 and 2016, and for the years then ended, have been derived from our consolidated financial statements. Our reporting currency is the Russian ruble and we prepare our consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

In April 2020, we disposed of the Elga coal complex, which was recognized as a discontinued operation in our consolidated financial statements. As a result, the financial data for the years ended December 31, 2019, 2018, 2017 and 2016 have been adjusted to reflect the disposal. For more information, see note 25 to the consolidated financial statements.

The selected financial data set forth below should be read in conjunction with, and is qualified in its entirety by reference to, “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements and the notes thereto included in this annual report on Form 20-F.

 

  Year Ended December 31, 
  2020  2019  2018  2017  2016 
  (In millions of Russian rubles, unless stated otherwise) 

Consolidated statement of profit (loss) and other comprehensive income data:

     

Revenue from contracts with customers

  265,454   287,153   303,795   291,543   269,083 

Cost of sales

  (170,605  (183,086  (174,058  (158,196  (143,611
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  94,849   104,067   129,737   133,347   125,472 

Total selling, distribution and operating income and (expenses), net

  (74,924  (69,867  (78,591  (76,367  (80,163
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating profit

  19,925   34,200   51,146   56,980   42,309 

Total other income and (expense), net

  (57,550  (15,212  (27,596  (37,331  (26,636

(Loss) profit before tax from continuing operations

  (37,625  18,988   23,550   19,649   18,673 

Income tax expense

  (2,528  (7,913  (2,653  (1,844  (4,908

(Loss) profit for the period from continuing operations

  (40,153  11,075   20,897   17,805   13,765 

Profit (loss) after tax for the period from discontinued operations, net

  41,609   (6,790  (7,361  (5,235  (4,938

Profit for the period

  1,456   4,285   13,536   12,570   8,832 

Less: profit attributable to non-controlling interests

  648   1,876   908   1,013   1,706 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit attributable to equity shareholders of Mechel PAO

  808   2,409   12,628   11,557   7,126 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Profit for the period

  1,456   4,285   13,536   12,570   8,832 

Exchange differences on translation of foreign operations

  2,042   (1,771  (9  313   431 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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  Year Ended December 31, 
  2020  2019  2018  2017  2016 
  (In millions of Russian rubles, unless stated otherwise) 

Net (loss) gain on available for sale financial assets

  —     —     —     —     (1

Re-measurement of defined benefit plans

  200   (867  487   145   (23

Net gain (loss) on equity instruments designated at fair value through other comprehensive income

  53   —     —     —     —   

Total comprehensive income (loss) for the period, net of tax

  3,751   1,647   14,014   13,028   9,239 

Total comprehensive income attributable to non-controlling interests

  652   1,857   918   1,016   1,710 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss) attributable to equity shareholders of Mechel PAO

  3,099   (210  13,096   12,012   7,529 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) earnings per share from continuing operations (Russian rubles per share), basic and diluted

  (99  22   48   40   29 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings (loss) per share from discontinued operations (Russian rubles per share)

  101   (16  (18  (12  (11
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share (Russian rubles per share) attributable to common equity shareholders, basic and diluted

  2   6   30   28   18 

Dividends declared per common share (Russian rubles per share)

  —     —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Dividends declared per preferred share (Russian rubles per share)

  —     3.48   18.21   16.66   10.28 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average number of common shares

  412,589,910   416,256,510   416,270,745   416,270,745   416,270,745 

Mining segment statement of profit (loss) data(1):

     

Revenue from contracts with customers

  105,283   121,227   125,653   134,846   114,629 

Cost of sales

  (53,842  (57,547  (53,384  (46,722  (42,276
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  51,441   63,680   72,269   88,124   72,353 

Total selling, distribution and operating income and (expenses), net

  (37,333  (36,905  (38,178  (40,050  (38,669
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating profit

  14,108   26,775   34,091   48,074   33,683 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Steel segment statement of profit (loss) data(1):

     

Revenue from contracts with customers

  173,510   180,919   193,764   180,382   168,893 

Cost of sales

  (143,480  (153,433  (149,349  (146,369  (126,745
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  30,030   27,486   44,416   34,013   42,148 

Total selling, distribution and operating income and (expenses), net

  (23,510  (20,399  (24,602  (24,859  (30,617
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating profit

  6,520   7,087   19,814   9,154   11,531 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Power segment statement of profit (loss) data(1):

     

Revenue from contracts with customers

  43,457   44,327   43,245   42,562   40,625 

Cost of sales

  (29,368  (31,269  (30,807  (29,907  (29,100
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  14,089   13,058   12,438   12,655   11,525 

Total selling, distribution and operating income and (expenses), net

  (14,397  (11,642  (15,811  (11,457  (10,877
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Operating (loss) profit

  (308  1,416   (3,374  1,198   648 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

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  Year Ended December 31, 
  2020  2019  2018  2017  2016 
  (In millions of Russian rubles, unless stated otherwise) 

Consolidated statement of financial position data (at period end):

     

Total assets

  193,840   312,505   317,625   319,127   325,465 

Equity attributable to equity shareholders of Mechel PAO

  (244,289  (245,228  (243,041  (253,066  (260,274

Equity attributable to non-controlling interests

  13,618   11,631   9,846   8,933   7,687 

Loans and borrowings, including interest payable, fines and penalties on overdue amounts of RUB 13,227 million, RUB 11,111 million, RUB 9,877 million, RUB 41,992 million and RUB 38,594 million as of December 31, 2020, 2019, 2018, 2017 and 2016, respectively

  314,836   381,317   412,294   422,533   434,165 

Non-current loans and borrowings

  2,201   7,205   6,538   17,360   11,644 

Consolidated statement of cash flows data:

     

Net cash provided by operating activities

  37,949   57,658   68,118   63,282   53,207 

Net cash used in investing activities

  84,383   (5,921  (5,647  (7,138  (4,969

Net cash used in financing activities

  (126,104  (48,357  (63,286  (55,737  (45,869

Non-IFRS measures(2):

     

Consolidated Adjusted EBITDA

  41,051   53,092   74,554   78,594   65,878 

Mining Segment Adjusted EBITDA

  26,259   39,669   44,855   59,494   42,448 

Steel Segment Adjusted EBITDA

  13,154   12,170   27,676   18,300   22,366 

Power Segment Adjusted EBITDA

  2,349   1,409   1,413   2,241   1,609 

 

(1)

Segment revenues and cost of sales include intersegment sales.

(2)

Adjusted EBITDA represents profit (loss) attributable to equity shareholders of Mechel PAO before depreciation and amortization, foreign exchange (gain) loss, net, finance costs including fines and penalties on overdue loans and borrowings and lease payments, finance income, net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, net, write-off of trade and other receivables, allowance for expected credit losses on financial assets, provision (reversal of provision) for doubtful accounts, change in provision for inventories at net realizable value, loss (profit) after tax for the period from discontinued operations, net, net result on the disposal of subsidiaries, profit (loss) attributable to non-controlling interests, income tax expense (benefit), effect of pension obligations, other fines and penalties, gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term, and other one-off items. Income tax, deferred tax and provision for fines and penalties related to the consolidated group of taxpayers and certain other assets and liabilities are not allocated to segments as they are managed on the group basis.

 

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Reconciliation of Adjusted EBITDA to profit (loss) attributable to equity shareholders of Mechel PAO is as follows for the periods indicated:

 

  Year Ended December 31, 
  2020  2019  2018  2017  2016 
  (In millions of Russian rubles) 

Consolidated Adjusted EBITDA reconciliation:

     

Profit attributable to equity shareholders of Mechel PAO

  808   2,409   12,628   11,557   7,126 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Add:

     

Depreciation and amortization

  14,286   13,410   12,216   12,762   12,170 

Foreign exchange loss (gain), net

  36,388   (18,288  24,187   (3,768  (23,912

Finance costs including fines and penalties on overdue loans and borrowings and lease payments

  25,145   33,863   37,514   42,989   51,650 

Finance income

  (3,504  (590  (33,943  (633  (1,137

Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, net, write-off of trade and other receivables, allowance for expected credit losses on financial assets, provision (reversal of provision) for doubtful accounts and change in provision for inventories at net realizable value

  3,748   3,801   9,447   6,496   7,030 

(Profit) loss after tax for the period from discontinued operations, net

  (41,609  6,790   7,361   5,235   4,938 

Net result on the disposal of subsidiaries

  23   —     (3  (470  (194

Profit attributable to non-controlling interests

  648   1,876   908   1,013   1,706 

Income tax expense

  2,528   7,913   2,653   1,844   4,908 

Effect of pension obligations

  169   188   492   (46  (177

Other fines and penalties

  3,001   1,874   1,506   2,539   1,477 

Gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term

  (122  (155  (412  (925  (115

Other one-off items

  (458  —     —     —     408 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Consolidated Adjusted EBITDA

  41,051   53,092   74,554   78,594   65,878 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mining Segment Adjusted EBITDA reconciliation:

     

Profit attributable to equity shareholders of Mechel PAO

  38,742   4,253   11,304   16,801   6,931 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Add:

     

Depreciation and amortization

  7,463   6,775   5,977   6,513   6,368 

Foreign exchange loss (gain), net

  7,400   (3,423  9,182   (3,911  (12,925

Finance costs including fines and penalties on overdue loans and borrowings and lease payments

  12,408   19,164   24,616   29,925   36,756 

Finance income

  (2,289  (901  (24,345  (1,810  (2,442

Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, net, write-off of trade and other receivables, allowance for expected credit losses on financial assets, provision (reversal of provision) for doubtful accounts and change in provision for inventories at net realizable value

  3,514   5,538   4,396   4,119   1,973 

Profit after tax for the period from discontinued operations, net

  (41,651  6,962   7,513   5,304   4,564 

Net result on the disposal of subsidiaries

  —     —     (3  (470  —   

Loss attributable to non-controlling interests

  110   701   183   407   511 

Income tax (benefit) expense

  (149  20   5,913   2,104   (110

 

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  Year Ended December 31, 
  2020  2019  2018  2017  2016 
  (In millions of Russian rubles) 

Effect of pension obligations

  118   138   459   (71  (204

Other fines and penalties

  880   513   (62  930   637 

Gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term

  (29  (71  (278  (347  (19

Other one-off items

  (258  —     —     —     408 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Mining Segment Adjusted EBITDA

  26,259   39,669   44,855   59,494   42,448 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Steel Segment Adjusted EBITDA reconciliation:

     

Loss (profit) attributable to equity shareholders of Mechel PAO

  (34,383  5,938   693   (4,533  7,619 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Add:

     

Depreciation and amortization

  6,335   6,153   5,738   5,800   5,435 

Foreign exchange loss (gain), net

  28,928   (14,841  14,969   144   (10,904

Finance costs including fines and penalties on overdue loans and borrowings and lease payments

  14,403   14,839   13,825   14,136   17,411 

Finance income

  (3,306  (450  (9,874  (717  (2,234

Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, net, write-off of trade and other receivables, allowance for expected credit losses on financial assets, provision (reversal of provision) for doubtful accounts and change in provision for inventories at net realizable value

  97   (1,753  1,547   1,888   4,582 

(Profit) loss after tax for the period from discontinued operations, net

  —     (39  (18  —     406 

Net result on the disposal of subsidiaries

  23   —     —     —     (194

Profit attributable to non-controlling interests

  217   996   637   417   1,056 

Income tax expense (benefit)

  676   503   (531  203   (1,485

Effect of pension obligations

  46   47   30   22   26 

Other fines and penalties

  291   859   788   1,512   742 

Gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term

  (93  (82  (131  (573  (95

Other one-off items

  (80  —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Steel Segment Adjusted EBITDA

  13,154   12,170   27,676   18,300   22,366 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Power Segment Adjusted EBITDA reconciliation:

     

(Loss) profit attributable to equity shareholders of Mechel PAO

  (1,081  351   (2,631  39   (451
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Add:

     

Depreciation and amortization

  488   482   500   448   367 

Foreign exchange loss (gain), net

  59   (24  37   (2  (83

Finance costs including fines and penalties on overdue loans and borrowings and lease payments

  447   653   581   880   1,078 

Finance income

  (23  (31  (1,231  (57  (54

Net result on the disposal of non-current assets, impairment of goodwill and other non-current assets, net, write-off of trade and other receivables, allowance for expected credit losses on financial assets, provision (reversal of provision) for doubtful accounts and change in provision for inventories at net realizable value

  139   14   3,504   486   474 

 

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  Year Ended December 31, 
  2020  2019  2018  2017  2016 
  (In millions of Russian rubles) 

(Profit) loss after tax for the period from discontinued operations, net

  —     (132  (133  (69  (32

Net result on the disposal of subsidiaries

  —     —     —     —     —   

Loss attributable to non-controlling interests

  321   180   87   189   139 

Income tax (benefit) expense

  (34  333   (83  229   73 

Effect of pension obligations

  5   4   4   3   2 

Other fines and penalties

  2,148   (419  781   98   98 

Gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term

  (1  (2  (3  (5  (1

Other one-off items

  (119  —     —     —     —   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Power Segment Adjusted EBITDA

  2,349   1,409   1,413   2,241   1,609 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA is a measure of our operating performance that is not required by, or presented in accordance with, IFRS. Adjusted EBITDA is not a measure of our operating performance under IFRS and should not be considered as an alternative to net income, operating income or any other performance measures derived in accordance with IFRS or as an alternative to cash flow from operating activities or as a measure of our liquidity. In particular, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We believe that Adjusted EBITDA provides useful information to investors because it is an indicator of the strength and performance of our business operations, and it allows investors to evaluate and compare our periodic operating performance, and it is the relevant measure for capital intensive industries with long-life assets.

Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of our operating results as reported under IFRS. Some of these limitations are as follows:

 

  

Adjusted EBITDA does not reflect the impact of depreciation and amortization on our operating performance. The assets of our businesses which are being depreciated and/or amortized (including, for example, our mineral reserves) will have to be replaced in the future and such depreciation and amortization expense may approximate the cost to replace these assets in the future. By excluding such expense from Adjusted EBITDA, Adjusted EBITDA does not reflect our future cash requirements for such replacements.

 

  

Adjusted EBITDA does not reflect the impact of foreign exchange gains and losses, which may recur.

 

  

Adjusted EBITDA does not reflect the impact of finance income and finance costs including fines and penalties on overdue loans and borrowings and lease payments, which are significant and could further increase if we incur more debt, on our operating performance.

 

  

Adjusted EBITDA does not reflect the impact of the net result on the disposal of non-current assets on our operating performance, which may recur.

 

  

Adjusted EBITDA does not reflect the impact of impairment of goodwill and other non-current assets, net, which may recur.

 

  

Adjusted EBITDA does not reflect the impact of write-off of trade and other receivables, which may recur.

 

  

Adjusted EBITDA does not reflect the impact of allowance for expected credit losses on financial assets, provision (reversal of provision) for doubtful accounts, which may recur.

 

  

Adjusted EBITDA does not reflect the impact of change in provision for inventories at net realizable value, which may recur.

 

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Adjusted EBITDA does not reflect the impact of profits and losses after tax for the period from discontinued operations.

 

  

Adjusted EBITDA does not reflect the impact of net result on the disposal of subsidiaries.

 

  

Adjusted EBITDA does not reflect the impact of profits and losses attributable to non-controlling interests on our operating performance.

 

  

Adjusted EBITDA does not reflect the impact of income tax expenses and benefits on our operating performance.

 

  

Adjusted EBITDA does not reflect the impact of effect of pension obligations.

 

  

Adjusted EBITDA does not reflect the impact of other fines and penalties.

 

  

Adjusted EBITDA does not reflect the impact of gain on restructuring and forgiveness of trade and other payables and write-off of trade and other payables with expired legal term.

 

  

Adjusted EBITDA does not reflect the impact of other one-off items.

 

  

Other companies in our industry may calculate Adjusted EBITDA differently or may use it for different purposes than we do, limiting its usefulness as a comparative measure.

We compensate for these limitations by relying primarily on our IFRS operating results and using Adjusted EBITDA only supplementally. See our consolidated statement of financial position, consolidated statement of profit (loss) and other comprehensive income and consolidated statement of cash flows included elsewhere in this document.

Risk Factors

An investment in our shares and ADSs involves a high degree of risk. You should carefully consider the following information about these risks, together with the information contained in this document, before you decide to buy our shares or ADSs. We have described only the risks that we consider to be material. However, there may be additional risks that we currently consider not to be material or of which we are not presently aware. If any of the following risks actually occurs, our business, financial condition, results of operations or prospects could be materially adversely affected. In that case, the value of our shares or ADSs could also decline and you could lose all or part of your investment.

COVID-19 Impact

The novel coronavirus (COVID-19) was declared by the World Health Organization to be a global pandemic on March 11, 2020. Response measures implemented by governments around the world, including the development and widespread use of vaccinations, have raised expectations for global economy growth in 2021 (although new waves of the pandemic and new variants of the virus leave substantial room for uncertainty). However, the COVID-19 pandemic is having an impact on our entire risk landscape and will continue to have impact, the extent of which depends on various factors which are beyond of our control. Particularly, the global COVID-19 pandemic is having an impact on our operations, suppliers, customers, governments and the general public through government measures aimed at mitigating the further spread of the virus. These measures include restrictions on travel, closure of national borders, imposition of quarantines, introduction of import restrictions, prolonged closures of workplaces and curfews or other social distancing measures.

Due to the uncertainty of the duration and impact of the COVID-19 pandemic, we are continually evaluating variety of scenarios with the financial impacts across the group. We have also carried out risk assessments for each of our business units, considering potential strategic, operational and regulatory related impacts. We have incorporated COVID-19 commentary below, which gives an overview of the related uncertainties and potential impacts on the group. These should be accurately considered along with the principal risk factors that are highlighted below.

 

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Customers Demand and Supply Chain

Our supply chain which involves our global customers and domestic customers in Russia, can be adversely affected by the COVID-19 pandemic. In particular, economic downturn caused by further development of COVID-19 outbreak can adversely affect the business of our customers, which in turn can affect demand for our key products such as coal, steel and steel products. The prolonged economic downturn may result in lower revenues and negatively impact our financial position and ability to repay indebtedness.

Moreover, the group is reliant on logistics infrastructure in order to deliver coal, steel and steel products to the customers located in Asia, Europe, the CIS and other regions. COVID-19 quarantine measures, including any import restrictions, may affect our ability to use logistics infrastructure and deliver our products to the customers. As a result, any disruptions in logistics infrastructure caused by COVID-19 outbreak may adversely affect our results of operations.

While we take efforts to minimize the risks and effects, any adverse impact on our supply chain could impact the reliability of supply of our products and our relationships with customers, which in turn may result in lower demand for our products, negatively impact our revenues and affect our results of operations.

Reliability of Supplies

COVID-19 related challenges may have a negative impact on our suppliers’ business and operations. As a result, this may affect performance of our suppliers. In particular, our suppliers may non-perform or fail to perform in a timely manner their undertakings under the contracts entered into with the group. This may result in inability of the group to receive goods and services that the group needs for its day-to-day operations, such as, for example, materials and equipment. Inability to receive goods and services used for our operations may affect the group’s product output and our ability to continue our operations.

Personnel

Due to cost optimization and austerity measures that may be required to be taken by us if the COVID-19 pandemic adversely affects our businesses and liquidity in the future, we may fail to retain employees and attract suitable talents to the company. The productivity of our employees may be negatively impacted due to isolated remote working from home, quarantine requirements, negative social sentiment and personal anxiety. Our operations could get disrupted if any of the employees test positive for COVID-19 when visiting the office or the production plants. All these could further adversely affect our ability to continue our operations and develop our business.

Moreover, due to stricter safety standards, our cost of compliance with COVID-19 related safety requirements may increase. Higher costs have to be incurred to ensure a safe and hygienic workplace for operations that are run from office and at our production plants. This would impact the profitability which might not be correspondingly reflected in the product pricing.

Significant Control Failure

Although COVID-19 pandemic has not had significant impact on our business processes, there is no guarantee that further COVID-19 outbreak will not affect our internal controls over financial reporting, which in turn may result in our inability to prevent or detect misstatements. This could result in financial misstatement, financial loss or key decision being taken based on incorrect information.

IT Technology and Cyber Security

Our IT technology infrastructure plays a critical role in our operations. With further development of COVID-19, IT infrastructure and resources can become scarcely available to us due to shortage, remote working and limited capacity of existing infrastructure. This, in turn, may negatively impact operational efficiency and thereby affect our financial performance and results of operations.

 

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The sustained absence of key staff due to the COVID-19 pandemic could adversely affect our ability to defend against cyber-attacks. We continue to develop our cyber defense capability, make use of proactive threat-hunting and invest more in automatic detection and prevention systems. If we are unable to successfully implement these enhancements, we may not be able to protect our information and data. In addition, to the extent that any disruption or security breach results in a loss of or damage to employees’ personal data or applications, or inappropriate disclosure of confidential information, we may incur liability as a result, including costs to remedy the damage caused by these disruptions or security breaches.

Risks Relating to Our Financial Condition and Financial Reporting

There is substantial doubt about our ability to continue as a going concern.

Notwithstanding successful restructuring with VTB Bank and Gazprombank in 2020, we still have significant debt that we do not have the ability to repay without refinancing or restructuring, and our ability to do so is dependent upon continued negotiations with our creditors, and there is substantial doubt about our ability to continue as a going concern. See note 4 to our consolidated financial statements in “Item 18. Financial Statements.” We also note that we have defaulted on payments of principal and interest under the group’s non-restructured export credit facility agreements with international lenders (“ECA-lenders”) and have been and continue to be in non-compliance with a number of financial and non-financial covenants contained in our loan agreements. See “— We have experienced and may continue to experience liquidity shortages and a working capital deficit,” “— Our creditors had accelerated and in the future may accelerate amounts due under our loan agreements due to our failure to comply with our payment and other obligations,” “— We may fail to comply with the terms of the restructured indebtedness or be unable to restructure all of our indebtedness in the future” and “— We have a substantial amount of outstanding indebtedness with restrictive financial covenants and most shares and assets in our subsidiaries are pledged.” These breaches constitute an event of default and cross-default under various loan agreements and, as a result, the creditors may request accelerated repayments and initiate legal procedures for enforcement of our debts. Although we have recently reduced our debt leverage and restructured significant amount of debt owed to VTB Bank, Gazprombank and certain other lenders, we do not have the resources to repay overdue debt or to enable us to comply with accelerated repayment requests, if such acceleration requests are delivered by the creditors.

Our plans, including the achievement of the restructuring of the remaining non-restructured portion of our debt and aligning the debt servicing with projected cash flows to be generated by our group in 2021 and beyond, are discussed in “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Outlook for 2021” and note 4 to our consolidated financial statements in “Item 18. Financial Statements.” Our future is dependent on our ability to refinance or restructure our remaining indebtedness successfully or otherwise address these matters. If we fail to do so for any reason, we would not be able to continue as a going concern and could be forced to seek relief under applicable bankruptcy or insolvency procedures, in which case our shares and ADSs would lose all or a substantial amount of their value. However, given management’s plans, our consolidated financial statements have been prepared on the basis that we will continue as a going concern entity, and no adjustments have been made in our consolidated financial statements relating to the recoverability and classification of the recorded value of assets, the amounts and classification of liabilities or any other adjustments that might result in any potential impact of us not being able to refinance or restructure our debt obligations as outlined in note 4 to our consolidated financial statements in “Item 18. Financial Statements.”

We have experienced and may continue to experience liquidity shortages and a working capital deficit.

We have experienced and may continue to experience liquidity shortages from, inter alia, high debt leverage and significant debt servicing payments, our investment program, commodity price decreases, currency fluctuations and other economic and financial difficulties, particularly since 2013. In the first half of 2014, as a result of the economic slowdown both in the export and domestic markets and a sharp decline in demand and prices for our products, we were unable to generate sufficient cash flows from operations to service and repay our

 

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indebtedness. Since 2015, we have restructured and refinanced a substantial amount of indebtedness, including loans from Russian state banks, pre-export credit facilities and bonds issuances. In April 2020, we have successfully agreed the new restructuring terms with our major Russian lenders, which allowed to reduce the group’s debt leverage by repayment of a significant amount of debt and agree on extension of maturities and new repayment schedules that are currently aligned with our projected cash flow. See “— We may fail to comply with the terms of the restructured indebtedness or be unable to restructure all of our indebtedness in the future.”

Our working capital deficit amounted to RUB 330,487��million as of December 31, 2020 as compared to RUB 393,407 million as of December 31, 2019. Cash and cash equivalents as of December 31, 2020 were RUB 1,706 million as compared to RUB 3,509 million as of December 31, 2019 and our total liabilities exceeded total assets by RUB 230,671 million as of December 31, 2020. For additional details about our capital requirements and resources, see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources.”

Any deterioration in our operating performance, including due to any worsening of prevailing economic conditions, fall in commodity prices (whether due to the cyclical nature of the industry or otherwise) and demand for our products and/or financial, business or other factors (including the imposition of further international sanctions against Russian companies or individuals, as well as certain industries, including steel and mining sectors), many of which are beyond our control, may adversely and materially affect our cash flow, liquidity and working capital position and may result in an increase in our working capital deficit and in our inability to meet our obligations as they fall due. If such a situation were to occur, we may be required to further refinance our existing debt and/or seek additional capital. However, there is no guarantee that we would be successful in such refinancing and/or restructuring of our debt or in raising additional capital in future (particularly if we or any of our subsidiaries, directors or officers, or significant counterparties are subject to international sanctions which could, among other things, prevent or restrict us from accessing foreign capital markets and/or supplying our products on certain export markets), or that we would be able to do so on a timely basis or on terms which are acceptable to us. Even if we were successful, the terms of such refinancing or new capital may be detrimental to holders of ADSs and shares including due to a dilution of their interests. Any of these factors could negatively impact our liquidity and working capital and have a material adverse effect on our business, financial condition, results of operations and the trading price of our ADSs and shares. In addition, Mechel has not been rated by any of “big three” credit rating agencies since Moody’s Investors Service withdrew our corporate family rating at our request in March 2015. The absence of an international rating (or the assignment of a poor rating) may reduce our opportunities to raise necessary debt financing, including by accessing the debt capital markets, on favorable terms or at all.

Poor liquidity and a working capital deficit could lead to debt repayment difficulties, defaults, enforcement of security and eventually insolvency. All these factors could lead to difficulties with refinancing or raising additional capital, making drawdowns under certain financing arrangements, including our revolving credit facilities (see “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Liquidity”), and would require further restructuring. See “— 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” and “— Risks Relating to the Russian Federation — Sanctions imposed by the United States and the European Union, as well as other politically related disagreements and allegations between Russia and other countries, 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.”

Our creditors had accelerated and in the future may accelerate amounts due under our loan agreements due to our failure to comply with our payment and other obligations.

Most of the loan agreements under which we or our subsidiaries are borrowers contain various representations, undertakings, restrictive covenants and events of default. Furthermore, according to the terms of

 

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such agreements, certain of our actions aimed at developing our business and pursuing our strategic objectives, such as acquisitions, disposal of assets, corporate restructurings, investments into certain of our subsidiaries and others, require prior notice to or consent from the respective lenders. We have restrictions on our ability to pay dividends, incur additional indebtedness and make certain capital expenditures, as well as expand through further acquisitions and use proceeds from certain disposals. A breach of our obligations under the loan agreements may give our creditors the right to claim for accelerated payment.

For example, during 2014 and 2015, VTB Bank and Sberbank decided to accelerate outstanding amounts due under our credit facilities due to our payment defaults. Although we managed to settle with VTB Bank and Sberbank, such acceleration, in turn, would give our other creditors the right to trigger acceleration under their loan agreements. In addition, we may be unable to settle any such claims in the future. See “— We may fail to comply with the terms of the restructured indebtedness or be unable to restructure all of our indebtedness in the future.”

In February 2017, a number of lenders under pre-export facility agreements filed requests for arbitration with the London Court of International Arbitration (the “LCIA”). In December 2017, we entered into a lock-up agreement with a majority of our international lenders in order to facilitate the pre-export facility restructuring. The terms of the lock-up agreement applied until July 16, 2018. At the end of July 2018, we started the process of refinancing of the pre-export facilities using a loan acquired from VTB Bank. In October 2018, the LCIA terminated the arbitrations due to settlement of the disputes. As of December 31, 2018, we had refinanced 99.99% of the pre-export facilities, and, in January 2019, the pre-export facilities were fully refinanced.

As of December 31, 2020, the overdue debt amounted to 11.1% of our total debt, and we were in breach of a number of financial and non-financial covenants contained in our loan agreements and in default as a result of triggering certain cross-default provisions. Such provisions allow the relevant creditors to claim for accelerated repayment of all outstanding amounts at any time; however, we have not received any acceleration notices from the creditors as of the date hereof. See “Item 5. Operating and Financial Review and Prospects — Liquidity and Capital Resources — Restrictive Covenants,” “Item 5. Operating and Financial Review and Prospects — Description of Certain Indebtedness,” “Item 10. Additional Information — Material Contracts” and “Item 13. Defaults, Dividend Arrearages and Delinquencies.”

Currently, we continue to be in default under our export credit facility agreements with certain international lenders, and are negotiating refinancing and restructuring thereof. The ECA-lenders have not waived their rights in respect of or granted their consent to our breaches. We regularly receive notifications on defaults under the facilities with our ECA-lenders, as well as reservations of rights and calls of guarantees from certain lenders. In January 2021, all export credit facility agreements matured without being repaid and ECA-lenders have the right to demand the payment, as well as to enforce over security in order to recover the debt. If the ECA-lenders proceed with enforcement of debt, this may trigger cross-default provisions in our other financing arrangements and result in substantially all of our indebtedness being accelerated. We do not have the resources to repay overdue debt or to enable us to comply with accelerated repayment requests immediately, if our creditors demand such accelerated repayment.

Our ability to continue to comply with our financial and other loan covenants in the future and to continue to service and refinance our indebtedness will depend on our results of operations and our ability to generate cash in the future and attract new financing and refinance the existing indebtedness, which will depend on several factors, including lenders’ credit decisions, limitations on the ability of Russian companies to access international capital markets as a result of a tightening of international sanctions against Russian companies and individuals and general economic, financial, competitive, legislative and other factors that are beyond our control. We cannot assure you that any breach of financial and other covenants in our loan agreements will not result in new demands from our lenders for acceleration of our loan repayment obligations or related litigation, including as a result of cross-defaults. If our indebtedness is accelerated in full or in part, it would be very difficult in the current financing environment for us to refinance our debt or obtain additional financing, and we could lose our

 

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assets, including fixed assets and shares in our subsidiaries, if our lenders foreclose on their liens, which would adversely affect our ability to conduct our business and result in a significant decline in the value of our shares and ADSs.

We may fail to comply with the terms of the restructured indebtedness or be unable to restructure all of our indebtedness in the future.

We have a number of facilities with ECA-lenders, which we intend to restructure in order to extend the repayment schedule and final maturity, as well as to decrease our interest payments. If we fail to negotiate restructuring of these agreements, lenders thereunder could enforce the debt and related security, which could lead to cross-defaults under our other agreements and could have a material adverse effect on our business, financial condition, results of operations and prospects.

In 2015, we signed agreements on restructuring of our debt with our major Russian lenders, such as VTB Bank and Gazprombank. We also signed restructuring agreements with Sberbank in February-April 2016, which granted a grace period and extended repayments of our debt, as well as waived all previous defaults. In December 2016, we signed the last set of the agreements with VTB Bank related to the first debt restructuring, which provided for extension of maturity of our credit lines until April 2022. Signing of these agreements was condition precedent to coming into effect of the similar provisions under agreements with Gazprombank and Sberbank. 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. In July 2018, we signed a new loan agreement with VTB Bank to refinance the pre-export credit facilities with a syndicate of banks. In November 2019, Sberbank assigned our debt and related security to VTB Bank.

In the second half of 2019, we initiated new discussions related to restructuring of our debt, and in the first half of 2020 we agreed the new restructuring terms with our major Russian lenders whose facilities constitute approximately 90% of our debt, which came into force in May 2020. The principal terms of the second restructuring included disposal of the Elga coal complex for RUB 89 billion, use of proceeds from disposal for partial repayment of indebtedness and deleveraging, as well as further extension of debt maturities. We sold the Elga coal complex, reduced our indebtedness, extended maturity of our debt owed to VTB Bank and Gazprombank for another seven years and agreed on new repayment schedules. Currently, the new financing terms provide for repayment of debt during the period of 2020-2027 with an option for further extension of maturity for another three years. Moreover, we were able to reduce the interest rates on certain group’s facilities denominated in U.S. dollars, retain the same interest rates for ruble-denominated facilities and security packages with respect to all of the facilities with our major Russian lenders. See “Item 5. Operating and Financial Review and Prospects — Restructuring of financial indebtedness.”

Our major Russian lenders required that all the loans provided to our subsidiaries be secured with the suretyship or pledge of assets of Mechel PAO or its subsidiaries. See “— We have a substantial amount of outstanding indebtedness with restrictive financial covenants and most shares and assets in our subsidiaries are pledged.” In accordance with the Joint-Stock Companies Law, such transactions normally require participation and obtaining of approval from a majority of disinterested shareholders of the company. Although we managed to obtain the required quorum for approvals in the past, including in June 2020 with respect to the new restructuring with VTB Bank and Gazprombank, we cannot predict whether we could obtain such shareholders’ approval in order to secure our loans in the future or whether we could get a waiver from the banks for the amendment of the security structure.

If we fail to comply with the terms of the restructured indebtedness or are unable to restructure our indebtedness in the future, our lenders may demand 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.

 

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We have a substantial amount of outstanding indebtedness with restrictive financial covenants and most shares and assets in our subsidiaries are pledged.

We have a substantial amount of outstanding indebtedness, primarily consisting of debt we incurred in connection with the financing of our acquisitions of Yakutugol and Oriel Resources in 2007 and 2008, as well as debt we incurred to finance our investment program and working capital needs in late 2008 and 2009. As of December 31, 2020, our consolidated total debt, including lease obligations, was RUB 330,755 million, of which RUB 322,695 million was short-term debt (including RUB 310,522 million with loan covenant violations, of which RUB 248,667 million was long-term debt reclassified to short-term debt due to defaults and cross-defaults under our loan agreements). Our finance costs for the year ended December 31, 2020 were RUB 25,145 million, net of the amount capitalized.

Most of our outstanding debt has restrictive financial covenants. See “Item 5. Operating and Financial Review and Prospects — Restrictive Covenants,” “Item 5. Operating and Financial Review and Prospects — Description of Certain Indebtedness” and “Item 10. Additional Information — Material Contracts.” Should we be in payment defaults or breaches of covenants and restrictions under our financial agreements and fail to receive waivers, the security may be enforced, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

In order to secure bank financings, we have pledged shares in certain our subsidiaries, including 99%-2 shares of Yakutugol, 95%+3 shares of Southern Kuzbass Coal Company, 91.66% of Chelyabinsk Metallurgical Plant, 50%+2 shares of common shares of Beloretsk Metallurgical Plant, 50%+2 shares of Korshunov Mining Plant, 87.5%+3 shares of Mechel Mining, 74%+1 share of Urals Stampings Plant, 25%+1 share of Izhstal, 25%+1 share of Port Posiet, 25% of registered capital of Port Temryuk, 25% of registered capital of Bratsk Ferroalloy Plant and 1.95% of shares of Mechel as of December 31, 2020. Also, some of our property, plant and equipment and certain other assets of our subsidiaries are pledged to the lenders. As of December 31, 2020, the carrying value of property, plant and equipment, inventory and accounts receivable pledged under our loan agreements amounted to RUB 23,920 million. See note 10.1(f) to the consolidated financial statements.

Our ability to make payments on our indebtedness depends upon our operating performance, which is subject to general economic and market conditions, commodity prices, and financial, business and other factors (including the maintenance or extension of international sanctions against Russian companies and individuals, as well as sanctions imposed on certain industrial sectors), many of which we cannot control. See “— We have experienced and may continue to experience liquidity shortages and a working capital deficit.”

Among other things, high levels of indebtedness, the restrictive financial covenants in our credit facilities and breaches thereof, as well as default on our loans, could potentially: (1) limit our ability to raise capital through debt financing; (2) limit our flexibility to plan for, or react to, changes in the markets in which we compete; (3) disadvantage our group relative to our competitors with superior financial resources; (4) lead to a loss of assets pledged as security; (5) render us more vulnerable to general adverse economic and industry conditions; (6) require us to dedicate all or a substantial part of our cash flow to service our debt; and (7) limit or eliminate our ability to pay dividends.

We may become subject to bankruptcy procedures, which may result in the inability of holders of our shares and ADSs to recover some or all of their investments.

Our future is dependent on our ability to refinance, restructure and service our indebtedness successfully. If we fail to do so for any reason, we may become subject to voluntary or involuntary bankruptcy proceedings, in which case our shares and ADSs may lose all or substantial amount of their value. See “— There is substantial doubt about our ability to continue as a going concern.”

Our creditors, including the Federal Tax Service of the Russian Federation, may file a bankruptcy petition with a court seeking to declare us insolvent if we are unable to make payments to our creditors in excess of

 

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RUB 300,000 within three months of such payments becoming due. In most cases, for such petition to be accepted, the outstanding indebtedness must be confirmed by a separate court decision or arbitral award that has already entered into force or upon expiration of 30 days from the date of the tax authority’s decision to collect indebtedness from funds or other property of the debtor. However, under the Federal Law No. 127-FZ “On Insolvency (Bankruptcy)” dated October 26, 2002, as amended (the “Bankruptcy Law”), financial (credit) organizations, which include our major creditors, may file a petition for bankruptcy without such separate court decision. The creditor has the right to apply to the arbitrazh court subject to preliminary not less than 15 days publication of a notice of intention to file a bankruptcy petition against the debtor in the Unified Federal Register of Information on Facts of Business Activity of Legal Entities. While in the past some of our creditors attempted to initiate bankruptcy proceedings against us and we have managed to settle those claims, if any creditor initiates court proceedings seeking to declare us insolvent, it could have a material adverse effect on our prospects and on the value of our shares and ADSs and may ultimately result in the inability of holders of our shares and ADSs to recover any of their investments.

From time to time, the group’s suppliers, services providers and other third-party creditors may file bankruptcy claims against us based on the formal debt limit provided by the Bankruptcy Law. Although we aim to settle such claims before court consideration, the overall debt of our group companies is substantial. There is a risk that our creditors may file bankruptcy petitions and we may be unable to settle the claims, which could have a material adverse effect on our prospects and on the value of our shares and ADSs, and our shareholders and ADS holders may lose all or substantial part of their investment.

The Bankruptcy Law is still developing and it remains subject to varying interpretations. While the Bankruptcy Law establishes the principle of adequate protection of creditors, debtors, shareholders and other stakeholders in bankruptcy, it often fails to provide instruments for such protection that are available in other jurisdictions with more developed bankruptcy procedures. Bankruptcy proceedings in Russia are often not conducted in the best interests of shareholders or creditors. In addition, Russian courts that conduct bankruptcy proceedings may be subject to a greater degree of political interference and may employ a more formalistic, and less commercially sophisticated, approach to rendering decisions than like court in other jurisdictions. Russian insolvency proceedings in the past have shown a bias towards liquidation and not rehabilitation or restructuring.

The Bankruptcy Law provides for the following order of priority for the satisfaction of creditor claims: (i) personal injury claims; (ii) employment claims (wages and severance payments) and royalty claims under copyright agreements; and (iii) all other claims. The claims of secured creditors are satisfied in accordance with a special procedure, that is, out of the proceeds of sale of the pledged or mortgaged assets. Equity claims of shareholders or ADSs holders may be satisfied only if any assets remain after all creditors have been paid in full. Therefore, there is a risk that our shareholders and ADS holders may lose all or substantial part of their investment. This risk is even more significant for ADS holders whose status in the bankruptcy proceedings is unclear.

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.

Some of our group companies have entered into lease agreements with different leasing companies for mining equipment, trucks, railcars and other assets.

Each of the lease agreements has a certain payment schedule. According to the Civil Code of the Russian Federation, as amended (the “Civil Code”), and the Federal Law No. 164-FZ “On Financial Leasing” dated October 29, 1998, as amended, a lessor is generally entitled to apply to a court for the early termination of a lease agreement if the lessee fails to make two consecutive payments under the lease agreement. The lessor is required to notify the lessee in writing and request fulfillment of its obligations under the lease agreement within a reasonable time before applying to the court.

 

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The lease agreements we have entered into generally provide the lessor with a right to terminate the contract unilaterally, without applying to the court, by way of sending a notification to the lessee in the event of non-payment within a specified period of time. The lessor is entitled to receive penalties in case of a delay in payment and early termination of the lease agreement due to the lessee’s default under the lease or certain loan arrangements as the lease agreements provide for relevant cross-default provisions. Upon termination of the lease agreement, the lessor is entitled to request the return of the leased equipment. If the lessee fails to return the equipment, the lessor is entitled to receive rental payments covering the time of the delay and compensation for damages if not covered by rental payments.

In the past, we failed to fulfill payment (and other) obligations under certain lease agreements resulting in court claims from the respective lessors requesting the termination of the lease agreements and the return of the leased assets to the lessors. Although we were able to settle with our lessors, there can be no assurance that similar breaches will not occur in the future. Any future breaches under our lease agreements resulting in the return of the leased equipment to the lessor could adversely affect our operating activities, which in turn could have a material adverse effect on our business, financial condition, results of operations and prospects.

Changes in the exchange rate of the ruble against the U.S. dollar and the euro and in interest rates may materially adversely affect our business, financial condition and results of operations.

Part of our sales are denominated in U.S. dollars, whereas the majority of our direct costs are incurred in rubles. In addition, we have foreign currency loans that are denominated in U.S. dollars and euros. Depreciation in real terms of the ruble against the U.S. dollar may result in a decrease in our costs relative to our export revenues assuming a stable level of prices for our products. Also, depreciation in real terms of the ruble against the U.S. dollar and/or euro may result in a reduction in our ability to service debt obligations denominated in U.S. dollars or euros. Conversely, appreciation in real terms of the ruble against the U.S. dollar may materially adversely affect our results of operations if the prices we are able to charge for our products do not increase sufficiently to compensate for the increase in real terms in our ruble-denominated expenditures. In 2020, the ruble depreciated in real terms against the U.S. dollar and the euro by 7.8% and 9.1%, respectively, as compared to 2019, according to the CBR. During 2020, the ruble depreciated from RUB 61.91 per U.S. dollar and RUB 69.34 per euro as at December 31, 2019 to RUB 73.88 per U.S. dollar and RUB 90.68 per euro as at December 31, 2020, respectively, which was primarily a result of slowdown in global economic activity and drop in oil prices. See “— The Russian economy and the value of our shares and ADSs could be materially adversely affected by fluctuations in the global economy.”

In an effort to protect the country’s foreign currency reserves from substantial depletion, the CBR moved to a free floating exchange rate regime in November 2014. In response to continuing ruble depreciation, the CBR in an unexpected, emergency meeting in December 2014 increased its key rate, which determines the borrowing costs for commercial banks, from 10.5% to 17%. The CBR subsequently decreased the key rate several times between 2015 and early 2018 to 7.25%, before increasing the key rate in late 2018 to 7.75%. During 2019, the key rate was gradually lowered to 6.25%. During 2020, the key rate was further lowered to 4.25%. Interest rates under our ruble-denominated facilities with Russian state banks are linked to the CBR key rate (plus a margin above the key rate). Should the CBR key rate increase again, or should interest rates under our existing facility agreements otherwise increase, we will face higher borrowing costs, which could have a material adverse effect on our business, cash flows, financial condition, results of operations and prospects.

Discontinuation of certain interest rate benchmarks could cause the group to renegotiate certain of its credit facilities.

Reference rates and indices, including interest rate benchmarks, such as the London Interbank Offered Rate (“LIBOR”), which are used to determine the amounts payable under financial instruments or the value of such financial instruments (“Benchmarks”), have, in recent years, been the subject of political and regulatory scrutiny

 

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as to how they are created and operated. This has resulted in regulatory reform and changes to existing Benchmarks, with further changes anticipated. These reforms and changes may cause a Benchmark to perform differently than it has done in the past or to be discontinued. Any change in the performance of a Benchmark or its discontinuation could have an adverse effect on any instrument referencing or linked to such Benchmark.

Some of the group’s credit facilities have a floating interest rate such as LIBOR and EURIBOR, including, for example, credit facilities with VTB Bank, and if for any reason the reference rates should become unavailable, such credit facilities might need to be renegotiated. There can be no assurance that the group will be able to renegotiate such credit facilities at least on similar terms, which could have an adverse effect on our business, financial condition, results of operations and prospects.

If limitations on the conversion of rubles into foreign currencies in Russia are imposed, this could cause us to default on our obligations.

Part of our indebtedness and part of our capital expenditures are payable in foreign currencies, including the U.S. dollar and the euro. Russian legislation currently permits the conversion of ruble revenues into foreign currency without limitation. If the Russian authorities were to impose limitations on the convertibility of the ruble or other restrictions on operations with rubles and foreign currencies, in the event of an economic crisis or otherwise, there may be delays or other difficulties in converting rubles into foreign currency to make a payment or delays in or restrictions on the transfer of foreign currency. This, in turn, could limit our ability to meet our payment and debt obligations, which could result in the loss of suppliers, acceleration of debt obligations and cross-defaults and, consequently, have a material adverse effect on our business, financial condition, results of operations and prospects.

Our business could be materially adversely affected if creditors of certain of our subsidiaries accelerate their debt.

If we decide to merge certain subsidiaries for operational reasons from time to time, under Russian law such mergers are considered to be a reorganization and the merged subsidiaries are required to publish the information regarding this reorganization twice: the first publication due at the beginning of the reorganization and the second to follow one month after the first publication. Russian law also provides that, for a period of 30 days after the date of latest publication, the creditors of merging subsidiaries have a right to file a claim seeking acceleration of the reorganized subsidiaries’ indebtedness and demand reimbursement for applicable losses, except in cases where the creditors have adequate security or are provided with adequate security within 30 days after filing of such claim. In the event that we undertake any such merger and all or part of our subsidiaries’ indebtedness is accelerated, we and such subsidiaries may not have the ability to raise the funds necessary for repayment, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Russian law restrictions on depositary receipt programs limit our access to equity capital and constrain our refinancing options.

Russian companies are limited in their ability to place shares in circulation outside of Russia, including in the form of depositary receipts such as our common American Depositary Shares (“common ADSs”) and our Global Depositary Shares (“GDSs”), each representing our common shares, as well as our preferred American Depositary Shares representing our preferred shares (“preferred ADSs,” and together with the common ADSs, the “ADSs”) due to Russian securities regulations. We received permission from the Russian Federal Financial Markets Service (“FFMS”) for up to 40% of our common shares to be circulated abroad through depositary receipt programs, which was the maximum amount allowed at that time. Later we also received FFMS permission for a total of 41,627,074 preferred shares to be circulated through depositary receipt programs, representing 30% of the total number of issued preferred shares, which was the maximum amount allowed at that time. Currently, Russian securities regulations provide that no more than 25% of the total number of a Russian company’s shares may be placed and circulated abroad through depositary receipt programs or otherwise.

 

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Currently, the CBR is the public authority responsible for issuance of such permissions. It is unclear whether the FFMS’s approvals of higher amounts prior to the establishment of this lower limit will be allowed to remain in place. As of December 31, 2020, our common ADSs and GDSs together accounted for approximately 17.5% of our common shares, and accordingly we believe we are limited in our ability to raise additional equity financing through placement of common shares in the form of depositary receipts. If the current limit is enforced, Deutsche Bank Trust Company Americas (the “depositary”) may be forced to cancel some of our common ADSs and GDSs and deliver a corresponding number of the underlying common shares to holders of common ADSs or GDSs. The Russian government or its agencies may also impose other restrictions on international financings by Russian issuers.

We had in the past material weaknesses in our internal control over financial reporting, and we make no assurances that any material weaknesses will not be identified in the future.

Management identified material weaknesses in our internal control over financial reporting as defined in Rule 12b-2 under the Securities Exchange Act of 1934 and Rule 1-02 of Regulation S-X that affected our financial statements for the years ended December 31, 2006, 2007, 2008, 2009, 2010, 2011, 2015 and 2016. Due to the effect of these material weaknesses, our auditors opined that we did not maintain effective internal control over financial reporting as of December 31, 2006, 2007, 2008, 2009, 2010, 2011, 2015 and 2016 under Section 404 of the Sarbanes-Oxley Act of 2002.

The latest material weakness was that we failed to operate effective controls over the IFRS financial statements close process, and this material weakness was disclosed as of December 31, 2016. We have implemented and executed our remediation plan, and as of December 31, 2017, the remediation plan activities were tested and the material weakness was considered as remediated. However, we make no assurances that no significant deficiencies or material weaknesses in our internal control over financial reporting will be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in the market price of our shares and ADSs.

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.

Our mining segment sells coal (metallurgical and steam), iron ore concentrate, coke and chemical products. These commodities are traded in markets throughout the world and are influenced by various factors beyond our control, such as global economic cycles and economic growth rates. Prices of these products have varied significantly in the past and could vary significantly in the future. For example, in 2020, coal prices were highly volatile. According to Metals & Mining Intelligence (“MMI”), a private information and research company, hard coking coal spot prices fluctuated in a wide range of $106-$163 per tonne (FOB Australia).

Our steel segment sells steel products, including semi-finished products, long products of a wide range of steel grades, carbon and stainless flat products, wire products, stampings and forgings and others, as well as ferrosilicon. Ferrosilicon is primarily used in the manufacture of steel and its market demand generally follows the cycles of the steel industry. The steel industry is highly cyclical in nature because the industries in which steel customers operate are subject to changes in general economic conditions. The demand for steel products thus generally correlates to macroeconomic fluctuations in the economies in which steel producers sell products, as well as in the global economy. The prices of 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 steelmaking processes. Steel products prices have experienced, and in the future may experience, significant fluctuations as a result of these and other factors, many of which are beyond our control.

 

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Our power segment generates and supplies power resources. Power demand in Russia depends on its consumption by the industrial sector, as well as various other factors, including the outside air temperature. 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. Market demand for the power produced by our power segment is affected by many of the same factors and cycles that affect our mining and metals businesses.

Slowing growth of the world economy due to stagnation of economies in Europe, slowing economic growth in China and the United States, trade tensions between China and the United States, international sanctions against Russia and Russian individuals or businesses, as well as impact of COVID-19 outbreak and related quarantine measures, may have adverse consequences for our customers and our business as a whole. See “— Risks Relating to the Russian Federation — Sanctions imposed by the United States and the European Union, as well as other politically related disagreements and allegations between Russia and other countries, 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.”

Prices for our products, including coal, iron ore, metals, ferrosilicon and power, as well as the prices of coal, iron ore, ferroalloys, power and natural gas and other commodities and materials we purchase from third parties for the production of our products, fluctuate substantially over relatively short periods of time and expose us to commodity price risk. We do not use options, derivatives or swaps to manage commodity price risk. We use our vertically integrated business model and intersegment sales, as well as short-term and long-term purchase and sales contracts with third-party suppliers and customers, to manage such risk. In addition, the length and pricing terms of our sales contracts on certain types of products are affected and can be regulated by orders issued by Russian antimonopoly authorities. In particular, pursuant to a directive issued to us by the Russian Federal Antimonopoly Service (“FAS”) in August 2008, we entered into long-term contracts for supply of certain grades of our coking coal with a formula of price calculation and with fixed volumes for the entire period of the contract. See “— Antimonopoly regulation could lead to sanctions with respect to the subsidiaries we have acquired or established or our prices, sales volumes and business practices.” Terms of sales of other types of our products may also be affected by regulations of the authorities. We cannot assure you that our strategies and contracting practices will be successful in managing our pricing risk or that they will not result in liabilities. If our strategies to manage commodity price risk and the impact of business cycles and fluctuations in demand are not successful, it could have a material adverse effect on our business, financial condition, results of operations and prospects.

The steel and mining industries are highly competitive, and we may not be able to compete successfully.

We face competition from Russian and international steel and mining companies. Consolidation in the steel and mining sectors globally has led to the creation of several large producers, some of which have greater financial resources and more modern facilities than our group. We also face price-based competition from emerging market producers, including, in particular, Mongolia, Indonesia, Columbia, Brazil, Malaysia, China, Kazakhstan, Turkey, Uzbekistan and Ukraine. Increased competition could result in more competitive pricing and reduce our operating margins.

Our competitiveness is based in part on our operations in Russia having a lower cost of production than competitors in higher-cost locations. We have been facing a consistent upward trend in the past several years in production costs, particularly with respect to wages and transportation. For example, our rail transportation costs increased consistently during the last three years with the railway tariff increases of 5.4% in 2018, 3.6% in 2019 and 3.5% in 2020. In addition, for export traffic, with certain exceptions, there was an additional increase to railway tariffs of 8.0% in 2018, 8.0% in 2019 and 8.0% in 2020. See “— A limited capacity of the railway infrastructure and an increase in railway tariffs expose us to uncertainties regarding transportation costs of raw materials and steel products,” “— Increasing costs of electricity, natural gas, diesel fuel and labor could materially adversely affect our operating margins” and “— Inflation could increase our costs and decrease operating margins.” If these production costs continue to increase in the jurisdictions in which we operate, our

 

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competitive advantage will be diminished, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

We will require a significant amount of cash to fund our capital investment program.

Our business requires maintenance capital expenditures in order to maintain production levels adequate to meet the demand for our products, as well as other capital expenditures to implement our business strategy. We spent RUB 4.4 billion during 2020 on our capital expenditures (including RUB 2.2 billion in maintenance capital expenditures). In planning for 2021, we followed our current investment policy focusing only on those items that are either close to completion or are of major importance for our operations. Our capital investment program currently contemplates capital spending of up to RUB 8.8 billion in 2021 (including up to RUB 6.5 billion in maintenance capital expenditures). A considerable part of the planned capital expenditures relate to the renewal of metallurgical and mining-and-transport equipment. Overall, we plan to spend up to RUB 36.1 billion for the three-year period of 2021-2023 on capital investments (including up to RUB 26.5 billion in maintenance capital expenditures). See “Item 4. Information on the Company — Capital Investment Program.”

Our ability to undertake and fund planned capital expenditures will depend on our ability to generate cash in the future and access debt financing. Lack of liquidity may jeopardize our capital expenditure plans, see “— We have experienced and may continue to experience liquidity shortages and a working capital deficit.” This, to a certain extent, is subject to general economic and market conditions, financial, competitive, legislative, regulatory and other factors (including the status of international sanctions against Russian companies and individuals, as well as sanctions imposed on certain types of products in different sectors) that are beyond our control. Raising debt financing for our capital expenditures on commercially reasonable terms (or at all) may be particularly challenging given our current high levels of indebtedness and restrictive covenants imposed under the loan agreements. Any deterioration in our operating performance, including due to a worsening of economic conditions, fall in commodity prices and/or financial, business or other factors, many of which are beyond our control, may adversely and materially affect our cash flow which may leave us unable to conduct our capital expenditure plans as necessary or required, which could adversely affect our business and our ability to comply with applicable regulations.

Successful implementation of our strategy to expand our coal sales depends on our ability to increase our export sales.

Our strategy to expand our coal sales, particularly high-grade coking coal and pulverized, or finely crushed, coal for injection (“PCI”), is substantially dependent on our ability to increase our production and exports of these products through ports in the Russian Far East to other countries, particularly Japan, China, Vietnam, South Korea and other Pacific Rim countries. We face a number of obstacles to this strategy, including oversupply and low demand, trade barriers and sales and distribution challenges, as well as restrictions imposed by antimonopoly legislation.

Currently, key ports in the Russian Far East have limited cargo-handling capacity, lack adequate port facilities and aging equipment. In particular, the limited capacity of the railways connecting to these ports is a critical impediment to the further development of port infrastructure and the entire transportation system in the Russian Far East. Increasing the capacity of the ports in the Russian Far East is one of the key issues identified in the “Transportation Strategy of the Russian Federation up to 2030.” According to this program, existing railway sections must be reconstructed, the logistics structure must be improved and the actions of the cargo owners, the ports’ management, Rosmorport, a state-owned enterprise established for seaports management, and Russian Railways, an open joint-stock company wholly owned by the Russian government, must be better coordinated. In addition, the shortage and poor condition of the locomotive fleet of Russian Railways, as well as major railway track repairs by Russian Railways in the summer months, result in restrictions on cargo volumes and increases in delivery times. Slowdown in train movements in the winter months has a negative impact on the state of bulk cargo as freezing occurs due to low temperatures, which further reduces the rate of discharge in ports and leads to congestion of railcars in the railway network.

 

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In 2019, Russian Railways announced the beginning of the second phase of the railway infrastructure development program, the purpose of which is to increase the capacity of the Baikal-Amur and Trans-Siberian Mainlines located in the Russian Far East by 2024. However, there can be no assurance that the development projects by Russian Railways will proceed according to existing plans, particularly in light of international sanctions against Russian companies and individuals. In addition, there is acute competition among Russian coal exporters for existing port capacity. In light of this shortage, Russian coal producers have endeavored to acquire ports or separate terminals to ensure the export of their products.

In May 2020, the Russian government introduced direct quotas for the volume of export shipments of coal by rail from the Kuzbass deposits in the direction of seaports and land border points in the Russian Far East. The Ministry of Energy of the Russian Federation approves on a monthly basis the volume of quota for each coal shipper from the Kuzbass deposits according to a formula that takes into account the current capacity of the Baikal-Amur and Trans-Siberian Mainlines, ports and border points of the Russian Far East, as well as the volume of coal shipments that each of the shippers effected in prior periods towards the west from Kuzbass. The new procedure affects, among other things, the shipments of coal produced by Southern Kuzbass Coal Company. Despite the fact that the introduction of this procedure at the moment has not led to a reduction in our ability to ship coal from Southern Kuzbass Coal Company in the direction of Port Posiet, there can be no assurance that future changes in parameters, such as total capacity of the Baikal-Amur Mainline, the Trans-Siberian Mainline and the ports of the Russian Far East, which are beyond our control, will not lead to a reduction in ability to ship coal, which will result in the need to search for alternative volumes to fully load the capacities of Port Posiet. Moreover, reduction in our ability to ship coal due to capacity issues of certain logistics infrastructure, may have a material adverse effect on our revenues, results of operations and prospects.

Our ability to increase coking coal export volumes is also limited by requirements to first satisfy Russian domestic coal demand, pursuant to a FAS directive issued to us in August 2008. See “— Antimonopoly regulation could lead to sanctions with respect to the subsidiaries we have acquired or established or our prices, sales volumes and business practices.” Failure to successfully manage the obstacles and tasks involved in the implementation of our export sales strategy could have a material adverse effect on our business, financial condition, results of operations and prospects.

Changes in our estimates of reserves or failure to implement mine development plans could result in lower than expected revenues, higher than expected costs or decreased operating margins.

We base our reserve information on engineering, economic and geological data, which is assembled, analyzed and reviewed by our staff, which includes various engineers and geologists, on an annual basis and is reviewed by independent mining engineers as of the acquisition dates as part of business combinations. The reserve estimates as to both quantity and quality are periodically updated to reflect production from reserves and new drilling, engineering or other data received. There are numerous uncertainties inherent in estimating quantities and qualities and the costs to mine recoverable reserves, including many factors beyond our control. Estimates of economically recoverable reserves and net cash flows necessarily depend upon a number of variable factors and assumptions, such as geological and mining conditions which may not be fully identified by available exploration data or which may differ from our experience in current operations, projected rates of production in the future, historical production from the area compared with production from other similar producing areas, the assumed effects of regulation and taxes by governmental agencies and assumptions concerning prices, operating costs, mining technology improvements, mineral extraction and excise tax, development costs and reclamation costs, all of which may vary considerably from actual results. In addition, it may take many years from the initial phase of drilling before production is possible. During that time, the economic feasibility of exploiting a discovery may change as a result of changes in the market price of the relevant commodity. Mine development plans may have to be revised due to geological and mining conditions and other factors described above, as well as due to shortages in capital funding. Our planned development projects also may not result in significant additional reserves and we may not have continuing success developing new mines or expanding existing mines beyond our existing reserves.

 

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The financial performance of our mining segment depends substantially on our ability to mine coal reserves that have the geological characteristics that enable them to be mined at competitive costs and to meet the quality needed by our customers. Actual tonnage recovered from identified reserve areas or properties and revenues and expenditures with respect to our reserves may vary materially from estimates. Replacement reserves may not be available when required or, if available, may not be capable of being mined at costs comparable to those characteristic of the depleting mines. Our ability to obtain other reserves through acquisitions in the future could be limited, among other things, by restrictions under our existing or future loan agreements, competition from other mining companies for attractive properties, the lack of suitable acquisition candidates or the inability to acquire mining properties on commercially reasonable terms. Furthermore, we may not be able to mine all or some of our reserves as profitably as we do at our current operations due to increases in wages, power and fuel prices and other factors.

Therefore, changes in our estimates of reserves or failure to implement mine development plans could result in lower than expected revenues, higher than expected costs or decreased operating margins, which could have a material adverse effect on our business, results of operations, financial condition and prospects.

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.

Our business depends on the continuing validity of our subsoil licenses and the issuance of new and extended subsoil licenses and our compliance with the terms thereof. In particular, in estimating our reserves, we have assumed that we will be able to renew our Russian subsoil licenses as and when necessary in the ordinary course of business so that we will be able to exploit the resources under such licenses for the operational life of the relevant subsoil plot. See “Item 4. Information on the Company — Regulatory Matters — Subsoil Licensing in Russia — Extension of licenses” and “— Mining Segment — Mineral reserves.” However, license extension is subject to the licensee being in compliance with the terms of the license. Our experience with license extensions and publicly available information about current market practice and available court practice suggest that regulatory authorities tend to focus on such terms of the license as production levels, operational milestones and license payments, which are considered to be material terms of the license. Nevertheless, there is no assurance that this approach will be consistently applied by the regulatory authorities and the courts, or that this approach will not change in the future. Regulatory authorities exercise considerable discretion in the timing of license issuance, extension of licenses and monitoring licensees’ compliance with license terms. Subsoil licenses and related agreements typically contain certain environmental, safety and production commitments. See “Item 4. Information on the Company — Regulatory Matters — Subsoil Licensing in Russia — Maintenance and termination of licenses.” If regulatory authorities determine that we have violated the material terms of our licenses, it could lead to rejection of our license extensions or suspension or termination of our subsoil licenses, and to administrative and civil liability. In addition, requirements imposed by relevant authorities may be costly to implement and result in delays in production. Our subsoil licenses expire on dates falling in 2023 through 2038. See the tables setting forth expiry dates of our Russian subsoil licenses in “Item 4. Information on the Company — Mining Segment” and reserves information. Accordingly, these factors may seriously impair our ability to operate our business and realize our reserves which could have a material adverse effect on our business, financial condition, results of operations and prospects.

We currently do not comply with the material terms of certain Russian subsoil licenses. In particular, we failed to commence commercial coal production at the Raspadsk license area (part of Olzherassky Open Pit) as required by the license due to unfavorable mine economics. In addition, we commenced preparation for the commercial development of the Yerunakovsk-1, Yerunakovsk-2 and Yerunakovsk-3 license areas, but failed to commence commercial production at these subsoil areas as required by the licenses due to unfavorable mine economics. As a result, in April 2017, the subsoil use right for the Yerunakovsk-2 license area was early terminated by the Federal Agency for Subsoil Use (“Rosnedra”). In August 2019, Rosnedra notified us of a possible early termination of the subsoil use right for the Yerunakovsk-1 and Yerunakovsk-3 license areas, if within one year the existing violations are not eliminated. In May 2020, the subsoil use right for the

 

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Yerunakovsk-1 and Yerunakovsk-3 license areas was early terminated by our own initiative due to inability to eliminate violations. Furthermore, we did not meet the deadlines for exploration completion, preparation for the commercial development and commencement of mining of the Pionerskoye and the Sivaglinskoye iron ore deposits due to lack of financing. As a result, in December 2019, Rosnedra early terminated the subsoil use right for the Pionerskoye and the Sivaglinskoye deposits. We challenged this decision of Rosnedra, and in October 2020 the court of the first instance declared it illegal. Rosnedra appealed, but the court of appeal upheld the decision of the court of the first instance. In February 2021, Rosnedra filed a cassation appeal, the hearing of which is scheduled for April 26, 2021.

Increasing costs of electricity, natural gas, diesel fuel and labor could materially adversely affect our operating margins.

In 2020, our Russian operations purchased in the wholesale and retail electricity and capacity markets approximately 3.1 billion kilowatt-hours (“kWh”) of electricity at a total cost of approximately RUB 9.5 billion, implying an average cost of approximately RUB 3.11 per kWh. According to the Ministry of Economic Development of the Russian Federation estimates, the average increase in market prices in the retail electricity market was 5.6% in 2020, and is expected to be in the range of 2.9-3.5% in 2021-2023. Further price increases for electricity may also occur in the future due to the increase in fuel prices.

Our Russian operations also purchase significant amounts of natural gas, primarily for the production of power resources at our own co-generation facilities, from Novatek PAO (“Novatek”), Russia’s largest independent producer of natural gas, Rosneft Oil Company (“Rosneft”), the government-controlled leader of Russia’s petroleum industry, and Gazprom PAO (“Gazprom”), the government-controlled dominant gas producer and the owner of the unified gas supply system of Russia. Domestic natural gas prices are regulated by the Russian government. In 2020, we purchased approximately 1.8 billion cubic meters of gas at a total cost of approximately RUB 7.4 billion. Russian domestic natural gas prices are significantly below Western European levels, which provides us with a cost advantage over our competitors, an advantage which may diminish as Russian domestic gas prices approach Western European levels. Starting from August 1, 2020, the FAS set wholesale prices of gas produced by Gazprom for domestic consumers on the territory of the Russian Federation, except for households, in the range of RUB 2,688 to RUB 5,097 per thousand cubic meters, as compared to prices set for the previous period which were set starting from July 1, 2019 in the range of RUB 2,610 to RUB 5,097 per thousand cubic meters, depending on the region of the Russian Federation where the gas is purchased.

We use petroleum products, in particular diesel fuel, as fuel for technological transport in our mining operations. In 2020, our Russian operations purchased approximately 158.8 thousand tonnes of diesel fuel at a total cost of approximately RUB 6.6 billion. The Russian diesel fuel market is controlled by a limited number of oil companies, including our major suppliers such as Rosneft, Gazprom Neft PJSC and LUKOIL PJSC. There is a free pricing regime for commercial consumers of petroleum products in Russia.

Following raw materials used in the production process and energy-related costs, our labor costs are the next most significant operational cost. Labor costs in Russia have historically been significantly lower than those in the more developed market economies of North America and Western Europe for similarly skilled employees. However, the average wage in the Russian Federation has increased in recent years, for example, by 8.5% and 4.8% in 2018 and 2019, respectively, according to Rosstat. Labor costs in Russia are indexed to and adjusted for inflation, which means that in the future labor costs may rise and our advantage with respect to our competitors with foreign operations that have historically had to pay higher average wages than those paid in Russia may be reduced.

Higher costs of electricity, natural gas, diesel fuel and labor could negatively impact our operating margins, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

 

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A limited capacity of the railway infrastructure and an increase in railway tariffs expose us to uncertainties regarding transportation costs of raw materials and steel products.

Railway transportation is our principal means of transporting raw materials and steel products to our facilities and to customers in Russia and abroad. The Russian rail system is controlled by Russian Railways, which is a state-sanctioned monopoly responsible for the management of all Russian railroads. The Russian government sets domestic rail freight prices and the terms of transportation, including the terms related to the type of rolling stock to be used for transportation of certain types of cargo and the estimated minimum tonnage for the purposes of determining the applicable tariff. These rail freight prices are subject to annual adjustment based on, among other factors, inflation and the funding requirements of Russian Railways’ capital investment program, which is in turn affected by the acute need to upgrade track infrastructure and passenger- and cargo-handling facilities. The Russian government and Russian Railways’ initiatives could result in further increases in our freight transportation costs, which could have an adverse effect on our business, results of operations, financial condition and prospects.

Our cargoes are currently transported in the railcars owned by our subsidiary Mecheltrans or third-party railcar owners, mainly to transport coal products and iron ore concentrate. Mecheltrans works with third-party railcar owners to arrange for transportation and forwarding cargoes with their railcars. The most significant railcar owners used by Mecheltrans for rail transportation include Federal Freight JSC, New Forwarding Company JSC, TFM-Operator OOO, Freight Company OOO, Atlant OOO and Titan AO. In 2020, our freight volume transported by third-party railcar owners amounted to 16.8 million tonnes, for which we paid RUB 6.7 billion.

In 2020, railway tariffs were indexed by 3.5%. Starting from January 1, 2021, railway tariffs have increased by an additional 3.7%. Along with the growth of tariff levels, a disruption in the transportation of our raw materials and products may occur. In recent years, the ban to extend the service life of railcars, the shortage of spare parts for their repair, as well as the deficit of the railcar fleet as a result of scheduled railway track repairs have led to a significant increase in prices of rolling stock operators’ services and a reduction in volume of transported cargo, including our cargo. In 2019, price increase for operators’ services ceased, however, all of the above factors may arise in the future and negatively impact our operating margins, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Inflation could increase our costs and decrease operating margins.

In 2020, 2019 and 2018, the consumer price inflation rate in Russia was 4.9%, 3.0% and 4.3%, respectively, according to the Russian Federal State Statistics Service (“Rosstat”). The increase in 2020 as compared to 2019 was primarily due to the depreciation of the ruble and an increase in prices on consumer goods and services. Inflation increases our operating costs on monetary items, which are sensitive to rises in the general price level in Russia, including fuel and energy costs, the cost of production services and salaries (as under existing collective bargaining agreements, wage indexation takes inflation into account). Inflation could also potentially increase the prices we can charge for our products. The impact of inflation on our operating margins depends on whether we can charge higher prices corresponding with the increase in costs. Nevertheless, there is a high risk that inflation will have an overall negative impact on our operating margins.

We face certain trade restrictions in the export of ferrosilicon to the European Union.

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 April 2014, following an expiry review, the antidumping duty was extended for another five years. At the end of this period, in April 2019, the European Commission issued a notice of initiation of an expiry review of the antidumping measures applicable to imports of ferrosilicon originating in Russia and the People’s Republic of China. In July 2020, the antidumping duty of 17.8% was extended for another five years. We may face additional antidumping duties and other trade restrictions in the European Union, the United States and other markets in the future. See “Item 4. Information on the Company — Steel Segment — Trade restrictions.”

 

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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.

Russia has in place import tariffs with respect to certain imported steel products that are generally advantageous to our business. These tariffs generally amount to 5% of the value of the imports. Almost all of our sales of steel products in Russia were protected by these import tariffs in 2020. The Republic of Belarus, the Republic of Kazakhstan and the Russian Federation entered into a Customs Union and implemented a Common Customs Tariff, which came into force on January 1, 2010, reducing import duties on stainless rolled products from 15% to 5%. Further, the Republic of Belarus, the Republic of Kazakhstan and the Russian Federation established the Eurasian Economic Union, which was enlarged in 2015 to include the Republic of Armenia and the Kyrgyz Republic. Creation of the Customs Union, as well as other actions and decisions of the Russian authorities in respect of tariffs and duties, can lead to further reduction of import duties.

Upon Russia’s entry into the World Trade Organization (“WTO”), the import tariffs and duties of Russia were reduced or eliminated, depending on the type of steel products. In particular, according to the WTO accession terms, Russian import duties on most types of steel products have been reduced to 5%, causing increased competition in the Russian steel market from foreign producers and exporters. A further reduction in such protective tariffs could have a material adverse effect on our business, financial condition, results of operations and prospects.

We are subject to mining and steelmaking operational risks.

Our operations, like those of other mining and steel companies, are subject to all of the hazards and risks normally associated with the exploration, development and production of natural resources, as well as the process of steelmaking, any of which could result in production shortfalls or damage to persons or property.

In particular, hazards associated with our open pit mining operations include, but are not limited to: (1) flooding of the open pit; (2) collapses of the open pit wall; (3) accidents associated with the operation of large open pit mining and rock transportation equipment; (4) accidents associated with the preparation and ignition of large-scale open pit blasting operations; (5) deterioration of production quality due to weather; and (6) hazards associated with the disposal of mineralized waste water, such as groundwater and waterway contamination.

Hazards associated with our underground mining operations include, but are not limited to: (1) underground fires and explosions, including those caused by flammable gas; (2) cave-ins or ground falls; (3) emissions of gases and toxic chemicals; (4) flooding; (5) sinkhole formation and ground subsidence; and (6) other accidents and conditions resulting from drilling, blasting and removing and processing material from an underground mine, including due to human error.

Hazards associated with our steelmaking operations include, but are not limited to: (1) accidents associated with the transportation of molten metal; (2) emissions of flammable gases and toxic chemicals; (3) accidents caused by the interaction of wet materials (charge) with molten metal; and (4) other accidents associated with high melting points of metal, including due to human error.

We are at risk of experiencing any and all of these hazards. The occurrence of such hazards could delay production, increase production costs, result in injury to persons or death, and damage to property, as well as liability for us. In 2020, production accidents at our operations resulted in three fatalities. Also, there was a self-heating of coal at Olzherasskaya-Novaya Underground in 2019, which caused the temporary suspension of mining operations. We continue to implement measures to cure the effects of this occasion and plan to resume production in the fourth quarter of 2021. We are implementing measures aimed at preventing production accidents and occasions in the future and we are cooperating with the competent governmental authorities, in particular, the Russian Federal Service for Ecological, Technological and Nuclear Supervision (“Rostekhnadzor”).

 

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The risk of occurrence of these hazards is also exacerbated by the significant level of age and use of the equipment of our enterprises. We are conducting a program of phased replacement and refurbishment of obsolete equipment in order to meet industrial safety requirements at our most hazardous facilities.

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, 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.

Our operations and properties are subject to extensive environmental control and regulation in the jurisdictions in which we operate. For instance, our operations generate large amounts of pollutants contained in air emissions, waste water and industrial waste, some of which are hazardous, such as benzapiren, sulfur oxide, sulfuric acid, nitrogen ammonium, sulfates, nitrites and phenicols. Some of our operations result in the creation of sludges, including sludges containing base elements such as chromium, copper, nickel, mercury and zinc. The creation, storage and disposal of such hazardous waste is subject to environmental regulations, including the requirement to perform decontamination and reclamation, such as cleaning up highly hazardous waste oil and iron slag. In addition, pollution risks and related costs are often impossible to assess unless environmental audits have been performed and the extent of liability under environmental and civil laws is clearly determinable. In 2019, as a result of an independent environmental audit of our production facilities located in the Chelyabinsk region, we signed an agreement on implementation of a set of measures aimed at improving the environmental situation in the region and reducing air emissions by 2024. In 2020, we performed a number of measures to replace gas-cleaning equipment at our production facilities. In January 2021, we signed another environmental agreement, according to which we undertook additional obligations to reduce emissions of pollutants into the air until 2026. Furthermore, in November 2020, Chelyabinsk Metallurgical Plant signed an agreement on the implementation of a set of measures to reduce the impact on water bodies (the Miass River) and improve the treatment of industrial waste water until 2024.

Environmental legislation in Russia is generally weaker and less stringently enforced than in the European Union or the United States. However, environmental laws and regulations are continually changing and are generally becoming more restrictive. New laws and regulations, the imposition of more stringent requirements for licenses, increasingly strict enforcement or new interpretations of existing environmental laws, regulations or licenses, or the discovery of previously unknown contamination, may require further expenditures to modify operations, install pollution control equipment or perform site clean-ups, the curtailment of operations or the payment of fees, fines and other penalties. For example, since October 2019, marine transport infrastructure facilities used for coal transshipment must comply with the best available technologies aimed at reducing pollutants discharge. Failure to comply with the requirements to equip business and other facilities located within the boundaries of water protection zones with structures ensuring the protection of water bodies from pollution, clogging, silting and depletion of water entails the imposition of an administrative fine or suspension of operations for up to 90 days. Moreover, the introduction of more stringent environmental laws and regulations could lead to the need for new or additional rehabilitation and decommissioning reserves or to an increase in our environmental liabilities, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Based on the current regulatory environment in Russia and elsewhere where we conduct our operations, as of December 31, 2020, we did not create any reserves for environmental liabilities and compliance costs, other than an accrual in the amount of RUB 4,989 million for rehabilitation provision. Any change in this regulatory environment could result in actual costs and liabilities for which we have not provided reserves.

In the course, or as a result, of an environmental investigation by the Russian governmental authorities, courts can issue decisions requiring part or all of the production at a facility that has violated environmental standards to be halted for a period of up to 90 days. We have been cited in Russia for various violations of environmental regulations in the past and we have paid certain fines levied by regulatory authorities in

 

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connection with these infractions. For example, in November 2017, the Russian Federal Service for the Supervision of Natural Resources (“Rosprirodnadzor”) conducted an inspection of Port Posiet and ordered it to equip the port area with a rainwater sewage system by October 1, 2018. We have applied several times for extension, and Rosprirodnadzor extended the implementation date of this order until March 1, 2021. Port Posiet did not complete the prescribed activities by this date. In March 2021, Rosprirodnadzor notified Port Posiet on initiation of an implementation control, which is expected to begin in the second half of March. In February 2018, the Khasansky District Court in Primorsky Krai also obliged Port Posiet to remedy violations of environmental and sanitary-epidemiological legislation until April 2019. Port Posiet implemented preparatory works for commencement of construction of the required treatment facilities, and in August 2019 applied for a stay of execution. The court allowed Port Posiet to stay of execution until November 1, 2020. In November 2020, Port Posiet applied for another stay of execution, which was rejected by the court. Currently, Port Posiet continues the construction of treatment facilities to comply with the court’s decision. In addition, as a result of an extraordinary inspection in March 2020, the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (“Rospotrebnadzor”) ordered Port Posiet to eliminate violations related to the excess concentration of coal dust and inadequate air pollution control measures by October 1, 2021.

Though our production facilities were not ordered to suspend operations due to environmental violations in the past, there are no assurances that environmental protection authorities will not seek such suspensions in the future. In 2017, the Department of Rosprirodnadzor for the Chelyabinsk region cancelled the permit for emissions of pollutants into the atmosphere issued to Mechel Coke. However, Mechel Coke challenged the cancellation, and, in February 2018, the cancellation was invalidated by a court.

Several criminal cases were initiated for violation of rules for handling of environmentally hazardous substances and wastes, as well as for excess of maximum permissible concentrations of harmful chemicals in the air in Chelyabinsk. In 2019, a number of employees of Mechel Coke were indicted of causing air pollution, however the criminal proceedings were discontinued due to the expiration of the term of criminal prosecution. Criminal charges for violating the environmentally hazardous substances handling rules were also brought against employees of Chelyabinsk Metallurgical Plant. It should be noted that the plaintiff has a right to bring civil claims for environmental damage compensation even if the criminal cases were terminated due to the expiration of the term of criminal prosecution and for other so-called non-rehabilitative grounds. Furthermore, respective orders of investigative and judicial authorities, court judgments in criminal cases could also serve as grounds for awarding damages against us under environmental claims.

In general, the pollutants emission into the atmosphere and discharge into the waters, as well as the disposal of industrial and consumer waste in the absence of a permit is a violation that may lead to the imposition of a fine or suspension of operations for up to 90 days, and in some cases may also lead to criminal liability of individuals including key management personnel of the group. In addition, in the absence of the permit, much higher fee tariffs apply as the entire volume of emissions, discharges and waste becomes above-limit.

Although we take measures to limit the adverse impact of our operations on the environment, violations of environmental laws and regulations may lead to suspension of our operations, damages awards, remedial actions or criminal liability, which in turn could have a material adverse effect on our business, financial condition, results of operations and prospects.

Increased regulations associated with climate change and greenhouse gas emissions may give rise to increased costs and may adversely impact our business and markets.

Through our mining segment, we are a major producer of carbon-related products such as coal and coal concentrate. A major by-product of the underground mining of coal is methane (CH4) and a major by-product of coal burning is carbon dioxide (CO2), both of which are considered to be greenhouse gases and generally a source of concern in connection with global warming and climate change.

 

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The December 1997 Kyoto Protocol established a set of greenhouse gas emission targets for developed countries that have ratified the Kyoto Protocol. In order to give the countries a certain degree of flexibility in meeting their emission reduction targets, the Kyoto Protocol developed mechanisms allowing participating countries to earn and trade emissions credits by way of implementing projects aimed at meeting the Kyoto Protocol targets. The European Union has established greenhouse gas regulations and many other countries are in the process of doing so. The European Union Emissions Trading System (“EU ETS”) has had an impact on greenhouse gas and energy-intensive businesses based in the European Union. Our operations in Lithuania are currently subject to the EU ETS, as are our EU-based customers.

The Russian Federation ratified the Kyoto Protocol in 2005 and, since October 2009, Russia has established a legal procedure for implementing trading mechanisms provided under the Kyoto Protocol. However, in 2012, Russia refused to sign up for the second period of limits set to begin in 2013 and remain in effect until 2020.

In December 2015 at the Paris climate conference, 196 countries adopted the United Nations Framework Convention on Climate Change. The agreement sets out a global action plan to avoid climate change. Russia ratified the Paris Agreement and it came into force on November 6, 2019. Russia’s target as part of the Paris agreement is to reduce greenhouse gas emissions to 70-75% of 1990 levels by 2030, provided that the maximum absorption capacity of forests is reached. Furthermore, 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 legal entities conducting business and other activities in Russia. In 2018, the Ministry of Economic Development of the Russian 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 still at the stage of development, and it is hard to predict when it would be adopted into a law.

Further Russia’s steps on implementation of the United Nations Framework Convention on 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. These regulatory programs may also have a negative effect on our production levels, profit and cash flows and on our suppliers and customers, which could result in higher costs and lower sales. Finally, we note that even without further legislation or regulation of greenhouse gas emissions, increased awareness and any adverse publicity in the global marketplace about the greenhouse gasses emitted by companies in the steel manufacturing industry could harm our reputation and reduce customer demand for our products.

Abnormal weather conditions and natural hazards could negatively impact our business.

Our production facilities are located in different climate and weather conditions, and abnormal weather changes and natural hazards could affect their operations. Interruptions in electricity supply and transport communication could lead to delays in deliveries of raw materials to our production facilities and finished products to consumers, as well as a suspension of production. For example, in 2020, as a result of calm weather which led to high gas contamination of the mine, mining operations at Korshunovsky Open Pit were suspended for 13 days; and icy rain caused the closure of railway traffic towards Port Posiet for 5 days. In addition, the existence of abnormally low temperatures for a long period of time may limit the work of the port infrastructure, crane equipment and mining-and-transport equipment. The negative impact of such abnormal or extreme climate and weather conditions may have an adverse effect on our business, financial condition, results of operations and prospects.

 

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Failure to comply with existing laws and regulations could result in substantial additional compliance costs or various sanctions which could materially adversely affect our business, financial condition, results of operations and prospects.

Our operations and properties are subject to regulation by various government entities and agencies in connection with obtaining and renewing various licenses, permits, approvals and authorizations, as well as with ongoing compliance with existing laws, regulations and standards. See “Item 4. Information on the Company — Regulatory Matters — Licensing of Operations in Russia.” Governmental authorities in countries where we operate exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licenses, permits, approvals and authorizations, and in monitoring licensees’ compliance with the terms thereof which may result in unexpected audits, criminal prosecutions, civil actions and expropriation of property. Governmental authorities have the right to, and frequently do, conduct periodic inspections of our operations and properties.

Our failure to comply with existing laws and regulations or to obtain and comply with all approvals, authorizations and permits required for our operations or findings of governmental inspections may result in the imposition of fines or penalties or more severe sanctions including the suspension, amendment or termination of our licenses, permits, approvals and authorizations or in requirements that we cease certain of our business activities, or in criminal and administrative penalties applicable to our officers. Any such actions, decisions, requirements or sanctions could increase our costs and materially adversely affect our business, financial condition, results of operations and prospects.

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 entering into transactions on less favorable terms than could be obtained on arm’s length basis.

Our Chairman, Igor Zyuzin may be deemed to be the beneficial owner of approximately 30.68% of our common shares. Our Chairman’s wife Mrs. Irina Zyuzina may be deemed to be the beneficial owner of approximately 19.61% of our common shares. Mr. Kirill Zyuzin, son of Mr. Igor Zyuzin and Mrs. Irina Zyuzina, may be deemed to be the beneficial owner of approximately 19.14% of our common shares. Ms. Ksenia Zyuzina, daughter of Mr. Igor Zyuzin and Mrs. Irina Zyuzina, may be deemed to be the beneficial owner of approximately 20.65% of our common shares. Therefore, Mr. Igor Zyuzin and Mrs. Irina Zyuzina together beneficially own 50.29% of our common shares. See “Item 7. Major Shareholders and Related Party Transactions.” Except in certain cases as provided by the Federal Law “On Joint-Stock Companies,” dated December 26, 1995, as amended (the “Joint-Stock Companies Law”), resolutions at a general shareholders’ meeting are adopted by a majority of the voting stock at a meeting where shareholders holding more than half of the voting shares are present or represented. Accordingly, Mr. Zyuzin and his family members have the power to control the outcome of most matters to be decided by a majority of the voting stock present at a general shareholders’ meeting and can control the appointment of the majority of directors and the removal of all of the elected directors if they act in concert. In addition, our largest shareholders are likely to be able to take actions, which require a three-quarters supermajority of the voting stock present at such a general shareholders’ meeting, such as amendments to our charter, reorganization, significant sales of assets and other major transactions, if other shareholders do not participate in such meeting. Thus, our largest shareholders can take actions that you may not view as beneficial or prevent actions that you may view as beneficial, and as a result, the value of our common shares and ADSs could be materially adversely affected.

We have also engaged and will likely continue to engage in transactions with related parties, including our largest shareholder, which may present conflicts of interest, potentially resulting in the conclusion of transactions on less favorable terms than could be obtained in arm’s length transactions. See “Item 7. Major Shareholders and Related Party Transactions — Related Party Transactions.”

 

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Our competitive position and future prospects depend on our senior management team.

Our ability to maintain our competitive position and to implement our business strategy is dependent on the performance of our senior management team and, in particular, Mr. Zyuzin, our Chairman and largest shareholder. Competition in Russia, and in the other countries where we operate, for senior management personnel with relevant expertise is intense due to the limited number of qualified individuals. The loss or decline in the services of members of our senior management team or an inability to attract, retain and motivate qualified senior management personnel could have a material adverse effect on our business, financial condition, results of operations and prospects.

Antimonopoly regulation could lead to sanctions with respect to the subsidiaries we have acquired or established or our prices, sales volumes and business practices.

Our business has grown substantially through the acquisition and founding of companies, many of which required the prior approval or subsequent notification of the FAS or its predecessor agencies. Relevant legislation restricts the acquisition or founding of companies by legal entities or individuals acting alone or jointly with their group of persons without such approval or notification. This legislation is vague in certain parts and subject to varying interpretations. If the FAS were to conclude that a company was acquired or created in contravention of applicable legislation and that competition has been or could be limited as a result, it could seek redress, including invalidating the transactions that led to or could lead to the limitation of competition, obliging the acquirer or founder to perform activities to restore competition, and seeking the dissolution of the new company created as a result of reorganization. Any of these actions could materially adversely affect our business, financial condition, results of operations and prospects.

In 2008, the FAS issued a number of directives to our companies placing certain restrictions on our business practices. On May 13, 2008, the FAS issued a directive ordering Mechel and Southern Kuzbass Coal Company, as a group of companies holding a dominant position in the Russian coking coal market, to fulfill the following requirements:

 

  

to avoid the unjustified reduction of production volumes and product range at Southern Kuzbass Coal Company;

 

  

to provide, to the extent possible, equal supply terms to all customers without discrimination against companies not forming part of this group of companies;

 

  

not to restrict other companies from supplying coking coal to the same geographical area of operations; and

 

  

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

 

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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 RUB 300,000 to RUB 1 million 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 revenue from sale of all goods, works and services in the market where such violation was committed, but not more than 2% of total revenue from sale of all goods, works and services in case of abuse of a dominant position and not more than 4% of total 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 compulsory split-up or spin-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.

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.

We may incur impairments to goodwill or other non-current assets which could negatively affect our future profits.

We assess, 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, we estimate the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or a cash-generating unit’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 a cash-generating unit exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

In assessing value in use, we use 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. The growth rates are based on our 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.

 

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We base our impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of our group’s cash-generating units 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 a cash-generating unit 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 our engineers.

Impairment losses of continuing operations are recognized in the consolidated statement of profit (loss) and other comprehensive income in expense categories consistent with the function of the impaired asset.

For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, we estimate the asset’s or the cash-generating unit’s recoverable amount. A previously recognized 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 recognized. 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 recognized for the asset in prior years. Such reversal is recognized 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 cash-generating unit (or group of cash-generating units) to which the goodwill relates. When the recoverable amount of the cash-generating unit is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

The amount of goodwill on our balance sheet as of December 31, 2020 that is subject to impairment analysis was RUB 12,932 million or 7% of our total assets. This amount includes goodwill of Yakutugol, Kuzbass Power Sales Company and Port Posiet of RUB 10,259 million, RUB 1,026 million and RUB 756 million, respectively, as of December 31, 2020. See note 17 to the consolidated financial statements.

Based on the results of the impairment analysis of goodwill we performed during 2020, an impairment loss of RUB 3,324 million was recognized. According to the results of the impairment analysis of non-current assets as of December 31, 2020, an impairment loss of RUB 573 million was recognized. See note 17 to the consolidated financial statements.

We continue to monitor relevant circumstances, including consumer levels, general economic conditions and market prices for our products, and the potential impact that such circumstances might have on the valuation of our goodwill and non-current assets. It is possible that changes in such circumstances, or in the numerous variables associated with our judgments, assumptions and estimates made in assessing the appropriate valuation of goodwill and recoverable value of non-financial assets, could in the future require us to further reduce our goodwill and non-financial assets and record related non-cash impairment charges. If we are required to record additional impairment charges, this could have a material adverse impact on our results of operations or financial position.

 

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A majority of our employees are represented by trade unions, and our operations depend on good labor relations.

As of December 31, 2020, approximately 55% 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. 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. 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 liabilities 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.

Disposal of the Elga coal complex may affect our growth in future.

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 required substantial amount of investment, which the group was not in a position to provide. In April 2020, the group disposed of the Elga coal complex for RUB 89 billion in order to reduce the group’s debt leverage. See “— We may fail to comply with the terms of the restructured indebtedness or be unable to restructure all of our indebtedness in the future.”

Elga Open Pit has a substantial amount of coal reserves amounting to 2,226.1 million tonnes or approximately 76% of the group’s total coal reserves as of December 31, 2019. Due to disposal of the asset, the group can be exposed to lower coal production levels in future, which could have adverse effect on our business, financial condition, results of operations and prospects.

 

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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 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 transactions, or do not approve or give prior consent to 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.

In the event the title to the shares of any company we acquired is successfully challenged, we risk losing our ownership interest in that company or its assets.

Almost all of our Russian assets consist of companies formed during the course of Russian privatizations in the 1990s and early 2000s and generally we acquired shares in these companies from third parties after their respective privatizations. Many privatizations are arguably deficient and, therefore, vulnerable to challenge because the relevant privatization legislation is vague, inconsistent or in conflict with other legislation. In the event that the privatization of any of our companies is successfully challenged, we could risk losing our ownership interest in that company or its assets, which could materially adversely affect our business, financial condition and results of operations.

In addition, under Russian law transactions in shares may be invalidated on many grounds, including a sale of shares by a person without the right to dispose of such shares, breach of interested party and/or major transaction rules and/or the terms of transaction approvals issued by governmental authorities, or failure to register the share transfer in the securities register. As a result, defects in earlier transactions with shares of our subsidiaries (where such shares were acquired from third parties) may cause our title to such shares to be subject to challenge.

 

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If transactions, corporate decisions or other actions of members of our group and their predecessors-in-interest were to be successfully challenged on the basis of non-compliance with applicable legal requirements, the consequences 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 their predecessors-in-interest at different times, have taken a variety of actions relating to the incorporation of entities, share issuances, share disposals and acquisitions, mandatory buy-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 of non-compliance with applicable legal requirements by competent state authorities, counterparties in such transactions or shareholders of the relevant members of our group or their predecessors-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.

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.

Terrorist attacks and threats, outbreaks or escalations of armed hostilities, as well as massive cyber-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.

We may be subject, directly or indirectly, to terrorist attacks and threats, outbreaks or escalations of armed hostilities, as well as massive cyber-attacks or incidents, and an increase in government regulation in response to such attacks or acts of war. These events could cause delays or losses in transportation and deliveries of our products to our customers, increased government regulation, decreased sales due to disruptions in the businesses of our customers, 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.

 

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We have used certain information in this document that has been sourced from third 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;

 

  

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;

 

  

news or analyst reports related to markets or industries in which we operate; and

 

  

general investor perception of investing in Russia.

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.

 

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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 to non-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. Currently, some of our subsidiaries do not meet this criterion 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 formal non-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 23 to the consolidated financial statements. In addition, our loan agreements contain restrictions on the payment of dividends on our common and preferred shares. See “Item 8. Financial Information — Dividend Distribution Policy.”

Some of our 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 our ADSs and GDSs on behalf of their holders if certain information of the ADS and GDS holders (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 compliance with Russian legal requirements. If the required information is not disclosed to the 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 GDS holders may be unable to vote the shares underlying their ADSs and GDSs, accordingly.

If any of these events were to occur, our ADS and GDS holders could be restricted or hindered from voting at Mechel’s shareholder meetings, which could impede our ability to implement business decisions and, in turn, materially and adversely affect our business, financial condition and results of 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 the depositary’s opinion, necessary or desirable to remedy the

 

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consequences of such thresholds or limits being exceeded or conditions being satisfied and to comply with any such law, directive or regulation, including, causing pro rata cancellation 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 website www.mechel.ru. 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 e-mails, text messages sent on the mobile phones, post or delivery to each of the above persons against signature or via publishing in the newspaper Rossiyskaya 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 and over-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.

 

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ADS holders may not be able to benefit from the United States-Russia income tax treaty.

Under Russian tax legislation, dividends paid to a non-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 companies 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. Pursuant to existing Russian tax legislation, 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 higher non-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 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 withholding tax in Russia if more than 50% of the organization’s 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 personal 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.

 

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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 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 December 31, 2020, out of the 138,756,915 issued preferred shares, approximately 39.5% are held by our wholly-owned subsidiary Skyblock Limited, the remaining preferred shares are held by the public. It is 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 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 by the Russian Federation on some countries and vice versa may lead to outflow of the investors from the market, as well as rapid, significant sales of Russian assets, which could 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 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.

 

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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 are subject to heightened volatility based on economic, military and political conflicts. For example, a military conflict in August 2008 between Russia and Georgia involving South Ossetia and Abkhazia, the accession of Crimea to Russia in March 2014, the ongoing crisis in Eastern Ukraine and the subsequent economic sanctions imposed on certain Russian companies and individuals by the United States, the European Union, Canada and other countries resulted in significant overall price declines in the Russian stock exchanges. See “— Risks Relating to the Russian Federation — Sanctions imposed by the United States and the European Union, as well as other politically related disagreements and allegations between Russia and other countries, 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.” The reaction of those countries, resulting geopolitical tensions and ensuing sanctions programs have had and could continue to have an adverse effect on the Russian economy, accelerating capital outflow from Russia and resulting in foreign exchange rate fluctuations and volatility on the Russian markets. 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 which could adversely affect investor interest and the Russian economy generally. The emergence or escalation of any tensions in Russia or neighboring regions could negatively affect the economy of Russia and other 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.

Partly as a result of political tensions, international sanctions, ruble volatility and a drop in oil prices, Standard & Poor’s, Moody’s and Fitch downgraded the 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 2020. As of the date hereof, the Russian Federation’s sovereign credit rating was “BBB-” (with a stable outlook) by Standard & Poor’s, “Baa3” (with a stable outlook) by Moody’s and “BBB” (with a stable outlook) by Fitch. However, there can be no assurance that further downgrades of Russia’s sovereign credit rating will not occur.

The risks associated with these events or potential future events could materially and adversely affect the business and investment environment, 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.

Sanctions imposed by the United States and the European Union, as well as other politically related disagreements and allegations between Russia and other countries, 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.

The United States and the European Union (as well as certain other countries) have imposed sanctions and export control restrictions on certain Russian individuals and entities and 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 and the European Union have imposed (i) sanctions that block the property of certain designated businesses, legal entities and individuals and restrict travel (“Blocking Sanctions”), (ii) sectoral sanctions that prohibit certain types of transactions with companies operating in the Russian energy, financial and defense 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 territory of Crimea, aiming at severely restraining any U.S. or EU-related business contacts with this territory. The Blocking Sanctions and the Sectoral Sanctions apply to individuals and entities named on the respective

 

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sanctions lists as well as to entities that are owned (directly or indirectly) 50% or more, in aggregate, by one or more sanctioned persons and, accordingly, may extend beyond Russia. In addition, on August 2, 2017, the U.S. President signed into law the Countering America’s Adversaries Through Sanctions Act (the “CAATSA”) that includes additional sanctions that may be introduced against Russian entities. In August 2018, the U.S. Department of State imposed new sanctions on Russia under the Chemical and Biological Weapons Control and Warfare Elimination Act 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) major 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. In October 2020, EU introduced new sanctions against six Russian individuals and one legal entity. 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 banks mentioned. We believe that our dealings with such persons do not violate applicable U.S. or EU sanctions programs. However, to the extent 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 for such dealings and/or be subject to related scrutiny by relevant authorities.

On August 2, 2019, the U.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 for non-Ruble denominated bonds issued by the Russian sovereign and also prohibited U.S. banks from lending non-Ruble denominated funds to the Russian sovereign 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 predict what impact these potential new sanctions or any retaliating measures by the Russian Government may have on the Russian economy or the group’s business.

Several pieces of legislation directed at amplifying U.S. sanctions against the Russian Federation have been introduced in the U.S. Congress and are currently under consideration. The current initiatives, if enacted, could affect, among other things, the Russian sovereign debt, Russian energy projects and the Russian 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.

Although no individual or entity within our group has been designated with U.S. or EU sanctions to date, there can be no assurance that further or more restrictive sanctions and/or export controls will not be introduced by the United States, the European Union or other countries which could affect such persons and increase the adverse effects above.

Furthermore, certain entities within our group are EU persons 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. 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.

 

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The sanctions imposed by the United States and 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. These impacts could be more severe than those experienced to date.

Although the group has no reason to believe that it or its shareholders may be specifically targeted by the 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 might become unable to deal with persons or entities bound by the relevant sanctions, including financial institutions, transact in U.S. dollars, raise funds from investors, or access international capital markets generally and/or our existing funds might be blocked. Furthermore, relevant clearing systems, brokers and other market participants, as well as the 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. Any of the aforementioned could reduce the trading market for the ADSs or may otherwise materially impact the value of 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 been subject to abrupt downturns in the past. 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. Nevertheless, the positive trends were interrupted by the global financial crisis in late 2008, which led to a substantial decrease in the 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. According to Rosstat, the Russian economy recorded GDP growth of 2.8% in 2018 and 2.0% in 2019. In 2020, Russian GDP declined by 3.1% as a result of the introduced restrictive measures aimed at combating the COVID-19 pandemic and a drop in global demand for energy resources. The deterioration of the Russian economy in recent years resulted from an array of factors, including negative investor sentiment arising from the disturbances in Eastern 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 — Sanctions imposed by the United States and the European Union, as well as other politically related disagreements and allegations between Russia and other countries, 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.” Any 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.

 

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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 VTB Bank and Gazprombank, who recently 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 various day-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 gradually reduced the key rate to 7.25% between 2015 and early 2018 and introduced other measures aimed at supporting Russian banking 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%. During 2020, the key rate was further lowered to 4.25%. 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 Yugra Bank, or to recognize large loan loss provisions that required steps to replenish their capital, as in the cases 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.

Russia’s physical infrastructure is not as well developed or maintained as the infrastructure in more developed countries, which could disrupt normal business activity.

Russia’s physical infrastructure is not as well developed or maintained as the infrastructure in more developed countries. Such physical infrastructure includes the 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 Russia’s infrastructure, especially as it relates to transportation,

 

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and significant increases in charges and tariffs, could harm the national economy, disrupt the transportation of goods and supplies, add costs to doing business in Russia and may interrupt business operations 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 slowdown in growth of the global economy and deterioration of global economic indicators in certain periods followed by decline in demand, social and political instability in some Middle Eastern countries, as 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 weaken the value of the ruble against foreign currencies. In particular, the Brent Crude oil price suffered a significant decrease during 2014 and 2015. The commodity’s price declined from $112.36 per barrel on June 30, 2014 to $37.28 per barrel on December 31, 2015. Between 2016 and 2020, 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, $53.80 per barrel on December 31, 2018, $66.00 per barrel on December 31, 2019 and $51.80 per barrel on December 31, 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 collectability 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.

Following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom formally withdrew from the European Union on January 31, 2020 and entered into a transition period during which it continued complex negotiations with the European Union relating to the future trading relationship between the parties. This transition period ended on January 1, 2021, with an agreement outlining this future relationship signed by the United Kingdom and currently undergoing ratification by national parliaments of EU member states and the European Parliament. All sides will adhere to its tenets until the agreement is ratified by the EU Council. As such, some political and economic uncertainty remains about whether the terms of the relationship will differ materially from the terms before withdrawal.

In addition, the Chinese government’s unpredictable regulation of coal imports, including the implementation of stringent port restrictions, the rise of import duties, the setting of import quotas and the ban on coal imports, may adversely impact our results of operations. According to CRU, a leading provider of commodity research, Chinese authorities have regularly levied restrictions on coal imports and allotted import quotas to coal buyers, which are typically fixed at prior year levels. In October 2020, China imposed a ban on coal imports from Australia. The import ban has resulted in higher demand for coal from other countries

 

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including Russia and higher import prices for steam and coking coal in China. According to the General Administration of Customs of China, China’s coal imports in 2020 increased by 1.5% compared to 2019 as the Chinese government released extra import quota in December to restrain rapidly rising domestic prices. CRU anticipates that Chinese authorities will continue to control the volume of coal imports in the future by imposing restrictions intermittently.

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, 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 17 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 any change in the Russian Government or its programs or lack of consensus between the Russian President, the Prime Minister, the Russian Government, the Parliament and powerful political, social, religious, regional, economic or ethnic groups, as well as the continuation of and the development of international sanctions imposed on Russian institutions, legal entities 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, a series of political reforms were proposed purporting to reallocate powers and responsibilities among the Russian governmental authorities, including those of the Russian Parliament and the Government. In addition, further amendments were proposed in March 2020, under which the previous and current Presidents of Russia are allowed to participate in presidential elections for two additional terms following the amendment of the Constitution. In July 2020, following a public vote, the changes to the Russian Constitution necessary to implement proposed political reforms were enacted, however, further reforms would have to be administered and other laws would be necessary for the political decisions to become fully effective.

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.

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

 

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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.

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 from the end of the 1980s through the early 1990s. In 2020, Rosstat estimated Russia’s population at 146.7 million, a decline of 1.8 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 increased. However, the birth rate remains relatively low, which together with the aging and high mortality of the population, are the main challenges for Russia’s demographic development. According to World Bank, Russia’s working age population is predicted to decline by an estimated 11 million by 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

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 among federal laws, including among decrees, orders and regulations issued by the Russian President, the Russian government, federal ministries and regulatory authorities and among regional and local laws, rules and regulations;

 

  

limited judicial and administrative guidance on interpreting Russian legislation;

 

  

gaps in the regulatory structure due to the delay or absence of implementing legislation;

 

  

uncertainties in interpretation of Russian legislation and corporate law generally by Russian courts;

 

  

a high degree of discretion or arbitrariness on the part of governmental authorities; and

 

  

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 some 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 formal non-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 formal non-compliance with certain requirements during formation, reorganization or during its

 

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operation. There have been cases in the past in which formal deficiencies in the establishment process of a Russian legal entity or non-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. Currently, we have the following significant subsidiaries with negative net assets in accordance with the Russian accounting standards: Mechel-Steel Management, Kaslinsky Architectural Art Casting Plant, Port Kambarka, Metallurgshakhtspetsstroy, Southern Kuzbass Coal Company, Mechel Mining Management, Shakhtspetsstroy, Mechel-Remservice, Maritime Cargo Shipping, Mecheltrans Management, Izhstal, Mecheltrans Auto, Vyartsilya Metal Products Plant and Southern Kuzbass Power Plant.

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.

In mid-2008, Mechel came under public criticism by the Russian government with repeated statements 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. 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

 

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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 entering into transactions on less favorable terms than could be obtained on arm’s length 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;

 

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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. For more information, see Exhibit 2.1 to this Annual Report on Form 20-F.

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.

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

 

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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 audited for three calendar years immediately preceding the year of the decision to conduct the audit. Previous audits do not completely exclude subsequent claims relating to the audited period because Russian tax law authorizes upper-level tax inspectorates to re-audit taxpayers which were audited by subordinate tax inspectorates.

In November 2014, Russian legislation was significantly revised in order to prevent the misuse of low-tax jurisdictions for tax evasion 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 company. Such 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%). Starting with the calculation of the profits of controlled foreign companies for 2017 and thereafter, profits in the amount of not more than RUB 10 million are not subject to income tax. Russian tax law also provides for certain conditions under which the income of controlled companies qualifies as tax exempt. 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 the reporting year. In addition, Russian companies are required to disclose information about controlled foreign companies to the Russian tax authorities with the submission of supporting documents. 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 Economic Co-operation and Development (“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 Law No. 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”).

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 income 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 income 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. Under 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 income tax in respect of the profits of controlled foreign companies irrespective of the income 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

 

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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. Dividends from foreign companies to Russian companies are subject to a tax of 13%. From January 1, 2021 to December 31, 2023, the 0% rate can be applied by foreign organizations that have independently recognized themselves as tax residents of the Russian Federation, provided that certain conditions are met: (1) the foreign organization receiving dividends for at least 365 calendar days continuously owns of at least 50% contribution (stakes) in the equity (share) capital (fund) of the organization paying dividends or depositary receipts giving the right to receive dividends in the amount equal to at least 50% of the total amount of dividends paid by the organization; (2) the state (territory) of state registration of the foreign organization receiving dividends and the foreign organization paying dividends (if applicable) is not included in the list of states and territories approved by the Ministry of Finance of the Russian Federation that provide a preferential tax treatment and/or do not provide for the disclosure and provision of information during financial transactions (offshore zones); and (3) dividends are credited to the foreign organization’s accounts with Russian banks. 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 of set-off of tax loss accumulated by Russian companies, including companies within the consolidated group of taxpayers significantly changed. Such changes have led to an increase in the Mechel’s tax burden. During the period from 2017 to 2021, the amount of recognized loss for previous tax periods cannot exceed 50% of the tax base of the current period. It is possible that this limitation will continue to apply further, which will not allow recognizing accumulated losses in full. At the same time, the previously existing 10-year limit on the transfer of losses was 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 have 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. 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 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 can 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.

 

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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 can 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, 2020, we had RUB 561 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, including sales volumes, selling prices (coal, steel products) and operating costs forecasts, could be affected by 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 change the income tax regulations related to the consolidated group of taxpayers and prior year losses carried forward, 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 legal entities 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.

In Russia, established practice in applying the rules has only started 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

 

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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 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 apply only since January 1, 2020. Consequently, Russian companies cannot 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 and Country-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 a Country-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.

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” (the “Strategic Industries Law”). As at the date hereof, our subsidiaries Southern Urals Nickel Plant, which holds the subsoil license on land plots with nickel and cobalt ore deposits, Urals Stampings Plant and Port Posiet which are included in the register of natural monopolies and our subsidiaries Yakutugol and Vzryvprom which hold licenses to carry out activities related to the handling of industrial 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, 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.

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, 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 a buy-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.

 

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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 265,454 million in 2020, RUB 287,153 million in 2019 and RUB 303,795 million in 2018, 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), as well as a freight river port on the Kama River, a tributary of the Volga River in central Russia (Port Kambarka). We also have a fleet of freight railcars and long-haul trucks.

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 39 cities throughout Russia.

 

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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 are www.mechel.com and www.mechel.ru. Information posted on our website is not a part of this document. We have appointed CT Corporation System, located at 28 Liberty Street, New York, New York 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. 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, ropes, stampings and forgings, structural shapes, beams and rails.

Our steel segment production facilities in Russia include one integrated steel mill, one steelmaking 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.

 

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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 electricity and heat energy, and to maintain 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.

 

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LOGO

 

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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 second largest coking coal concentrate exporter by volume in Russia.

In 2020, we were the second largest coking coal producer in Russia, with an 11.7% 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 2020, our export sales of coking coal concentrate were the second largest by volume among Russian companies, according to MMI and our estimates.

We have a broad-range offering of high-quality metallurgical coals, as well as steam coals of various grades.

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 in PCI-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-soft and semi-hard coking coal, PCI, anthracite and steam coal. Most of the coal grades of Southern Kuzbass Coal Company are exported. Yakutugol produces low-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. 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 2020 by production volume we were Russia’s second largest producer of long steel products (excluding square billets), fourth largest producer of reinforcement bars (rebar) and second 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 2020 was 11.7%, according to Metal Expert. According to Metal Expert and Chermet, a Russian ferrous metals industry association (“Chermet”), we are Russia’s third largest producer of special steel by production volume, accounting for 11.6% of Russia’s total special steel output in 2020. 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 17.4% of Russia’s total wire products output in 2020.

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 2020, we were fully self-sufficient with respect to coke and ferrosilicon; we were approximately 61% self-sufficient with respect to iron ore concentrate; and we satisfied approximately 28% of our electricity needs internally. We believe that the level of our self-sufficiency in raw materials gives our steel business a competitive advantage.

 

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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-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 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 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 Southern Kuzbass Coal Company. We are in the process of the Port Posiet’s modernization, which will enable us to expand the cargo-handling capacity of the port up to 9.0 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, 2020, our subsidiaries Mecheltrans and Mecheltrans Auto owned and leased 11,240 freight transportation units, including 11,195 railcars and 45 long-haul trucks that we use to ship our products.

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, 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 is well-positioned 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.

 

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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 2020 was 11.7%.

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 79.9% of our mining segment sales and 21.3% of our total sales in 2020.

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 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 54.4% of our steel segment sales and 34.2% of our total sales in 2020.

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 enhance our position of one of the leading 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. Our coking coal and iron ore production form a solid platform for our steel business. Steam coal is used to feed our power generating business which

 

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enables us to market electricity and heat energy, and to maintain 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-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 the issuance of five certificates of conformity. 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 retain our leadership in special and stainless steels and wire products in Russia.

Our sales and distribution network provides us with a strong platform for further development of our sales. In the current economic situation, we are able 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. We have our railcar fleet to maintain 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, as well as the increase in our railcar fleet.

With a focus on improving the efficiency of our main businesses, we may also consider selective disposal of assets in order to reduce the debt burden and contribute to business development. In April 2020, we disposed of the Elga coal complex for a consideration of RUB 89 billion. All proceeds from the disposal were used by the group to reduce its debt level and partially repay indebtedness.

Our History and Development

We trace our beginnings to a small coal-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 acquisitions in Russia and abroad, Mechel has developed into a leading mining and metals 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 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 and Yakutugol, which together produced 9.6 million tonnes of raw coking coal, 4.3 million tonnes of raw steam coal and 2.0 million tonnes of raw anthracite in 2020. Our coke operations consist of Moscow Coke and Gas Plant and Mechel Coke, which together produced 2.7 million tonnes of coke in 2020. Our iron ore operations consist of Korshunov

 

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Mining Plant which produced 7.0 million tonnes of iron ore and 2.1 million tonnes of iron ore concentrate in 2020.

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 of low-volatile content.

Steam coal. Southern Kuzbass Coal Company and Yakutugol 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 blast furnaces 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) of low-ash, low-phosphorus and low-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 a by-product of 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 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 license for the Sutamskaya iron ore area located in Yakutia. This deposit contains high-quality iron ore, which will allow production 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. The advantages of our mining business include 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 approximately 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, 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.

 

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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  

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 our run-of-mine (“ROM”) coal production by type of coal and location of mines for the periods indicated.

 

   2020  2019  2018 
   Tonnes   % of
Production
  Tonnes   % of
Production
  Tonnes   % of
Production
 
   (In millions of tonnes)(1) 

Coking Coal

          

Yakutugol

   5.1     4.8     6.4   

Elgaugol OOO(2)

   0.8     2.8     3.4   

Southern Kuzbass Coal Company

   4.5     4.3     2.5   
  

 

 

    

 

 

    

 

 

   

Total Coking Coal

   10.4    60.8  11.9    63.0  12.3    65.4

Steam Coal

          

Yakutugol

   0.5     1.0     0.6   

Elgaugol OOO(2)

   0.4     1.5     1.5   

Southern Kuzbass Coal Company

   3.8     3.3     2.9   
  

 

 

    

 

 

    

 

 

   

Total Steam Coal

   4.7    27.5  5.8    30.7  5.0    26.6

Anthracite

          

Yakutugol

   —       —       —     

Southern Kuzbass Coal Company

   2.0     1.2     1.5   
  

 

 

    

 

 

    

 

 

   

Total Anthracite

   2.0    11.7  1.2    6.3  1.5    8.0
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total Coal

   17.1    100  18.9    100  18.8    100
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1)

Volumes are reported on a wet basis.

(2)

We disposed of the Elga coal complex in April 2020. See “Item 5. Operating and Financial Review and Prospects — Business Structure — Recent acquisitions and disposals.”

The coking coal produced by our Russian mines is predominately low-sulfur (0.3%) bituminous coal. Heating values for coking coal range from 6,861 to 8,488 kcal/kg on a moisture- and ash-free basis. Heating values for steam coal range from 6,627 to 8,286 kcal/kg on a moisture- and ash-free basis.

 

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The table below summarizes our saleable coal production by type of coal and location of mines for the periods indicated.

 

   2020  2019  2018 
   Tonnes   % of
Production
  Tonnes   % of
Production
  Tonnes   % of
Production
 
   (In millions of tonnes) 

Coking Coal

          

Yakutugol

   2.4    18.5  2.7    18  3.7    25

Elgaugol OOO(1)

   0.4    3.1  1.4    9  1.7    12

Southern Kuzbass Coal Company

   3.2    24.6  3.1    20  1.9    13
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total Coking Coal

   6.0    46.2  7.2    47  7.3    50

PCI

          

Yakutugol

   —      —     —      —     —      —   

Southern Kuzbass Coal Company

   1.8    13.8  1.5    10  1.2    8
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total PCI

   1.8    13.8  1.5    10  1.2    8

Anthracite

          

Yakutugol

   —      —     —      —     —      —   

Southern Kuzbass Coal Company

   1.3    10.0  1.0    7  1.1    8
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total Anthracite

   1.3    10.0  1.0    7  1.1    8

Steam Coal

          

Yakutugol

   1.9    14.7  2.4    16  2.4    16

Elgaugol OOO(1)

   0.5    3.8  1.9    13  1.5    10

Southern Kuzbass Coal Company

   1.5    11.5  1.1    7  1.2    8
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total Steam Coal

   3.9    30.0  5.4    36  5.1    34
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total Coal

   13.0    100  15.1    100  14.7    100
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1)

We disposed of the Elga coal complex in April 2020. See “Item 5. Operating and Financial Review and Prospects — Business Structure — Recent acquisitions and disposals.”

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.

 

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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
 

Neryungrinsky Open Pit

 LOGO 12336LOGO

(Moshchny seam)

  15.3  Open pit  2029   Dec 2024   In production   1979   Ownership 

Kangalassky Open Pit

 LOGO  15017LOGO

(Kangalassk)

  7.7  Open pit  2640   Dec 2027   In production   1962   Ownership 

Dzhebariki-Khaya Open Pit

 LOGO 15061LOGO

(Dzhebariki-
Khaya)

  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 produces low-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 an all-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.

 

   2020  2019  2018 

Mine

  Tonnes   % of Total
Production
  Tonnes   % of Total
Production
  Tonnes   % of Total
Production
 
   (In millions of tonnes)(1) 

Coking Coal

          

Neryungrinsky Open Pit

   5.1     4.8     6.4   
  

 

 

    

 

 

    

 

 

   

Total Coking Coal

   5.1    91.1  4.8    82.8  6.4    91.4
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Steam Coal

          

Neryungrinsky Open Pit

   0.0     0.5     0.0   

Dzhebariki-Khaya Open Pit

   0.3     0.3     0.4   

Kangalassky Open Pit

   0.2     0.2     0.2   
  

 

 

    

 

 

    

 

 

   

Total Steam Coal

   0.5    8.9  1.0    17.2  0.6    8.6
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total Coal

   5.6    100  5.8    100  7.0    100
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1)

Volumes are reported on a wet basis.

 

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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   2020   2019   2018 
       (In thousands of tonnes) 

Coking coal

   Asia    2,131.9    2,418.5    2,694.6 
   Russia    0.0    0.0    509.8 
   CIS    0.0    1.0    4.1 
   Europe    0.0    0.0    0.0 
    

 

 

   

 

 

   

 

 

 

Total

     2,131.9    2,419.5    3,208.5 

Steam coal

   Russia    593.0    563.7    614.2 
   Asia    211.7    108.8    51.4 
    

 

 

   

 

 

   

 

 

 

Total

     804.7    672.5    665.6 

Middlings

   Russia    512.1    218.8    1,512.3 
   Asia    1,382.2    1,173.8    394.6 
    

 

 

   

 

 

   

 

 

 

Total

     1,894.3    1,392.6    1,906.9 
    

 

 

   

 

 

   

 

 

 

Total

     4,830.9    4,484.6    5,781.0 
    

 

 

   

 

 

   

 

 

 

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 55% of Russia’s total coal production.

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. All of our Southern Kuzbass mines are located in southeast Kuzbass around the town of Mezhdurechensk in the Kemerovo region.

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 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.

 

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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

 LOGO 14016 LOGO (Tomsk, Sibirginsk)  22.4  Open pit  2055  Dec 2038 In production  1954  Lease
 LOGO  13367 LOGO  (Sorokinsk, Tomsk, Sibirginsk)  2.8    Nov 2025 In production  2012  Lease

Olzherassky Open Pit

 LOGO  01374 LOGO  (Raspadsk, Berezovsk, Sosnovsk)  10.1  Open pit  2050  Dec 2029 In production  1980  Lease
 LOGO  12939 LOGO  (Raspadsk)(2)  3.5    Dec 2024 Development  n/a  Lease
 LOGO  12940 LOGO  (Berezovsk-2, Berezovsk, Olzherassk)  4.8    Dec 2024 In production  2007  Lease
 LOGO  01917 LOGO (Berezovsk Gluboky)  7.4    Aug 2035 Development  n/a  Lease

Tomusinsky Open Pit

 LOGO 13312 LOGO (Tomsk)(3)  6.7  Open pit  2028  Dec 2025 In production  1959  Lease

Sibirginsky Open Pit

 LOGO 13639 LOGO (Sibirginsk, Kureinsk, Uregolsk)  16.4  Open pit  2055  Dec 2032 In production  1970  Lease
 LOGO  01557 LOGO (New-Uregolsk)  2.4    Apr 2031 In production  2011  Lease

Sibirginskaya Underground

     
LOGO 12917 LOGO (Sibirginsk, Tomsk)
  
    
5.9

 
     
Underground
  
    
2058

 
     
Dec 2024
     
In production
  
    
2002

 
     
Lease
 LOGO  15463 LOGO  (Sibirginsk-2, Sibirginsk, Kureinsk)  0.9    Dec 2032 In production  2014  Lease
 LOGO  01914 LOGO  (Sibirginsk-3)  7.6    Aug 2035 Development  n/a  Lease

V.I. Lenina Underground

 LOGO 14060 LOGO (Olzherassk)  10.0  Underground  2050  Dec 2032 In production  1953  Lease
 LOGO 01701 LOGO (Granichny, Olzherassk)  1.2    Feb 2033 Development  n/a  Lease,
Ownership

Olzherasskaya-Novaya Underground

 LOGO 14199 LOGO (Raspadsk)  1.2  Underground  2035  Apr 2026 In production  2008  Lease
 LOGO  01471 LOGO  (Olzherassk-2, Raspadsk)  0.2    Jan 2030 In production  2010  Lease
 LOGO  13366 LOGO  (Razvedochny, Raspadsk)  14.6    Nov 2025 In production  2010  Lease

Olzherasskaya-Glubokaya Underground (prospect)

 LOGO 13365 LOGO (Olzherassk)  19.2  Underground  2211  Nov 2025 Development  n/a  —  

Usinskaya Underground (prospect)

 LOGO 14093 LOGO (Olzherassk)  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. “Conservation” refers to sites where no mining activity is conducted, but measures for mine conservation are being taken.

(2)

We failed to commence commercial production as required by the subsoil license due to unfavorable mine economics. In September 2018, we started stripping works at the Raspadsk license area, which were continued in 2019. In 2020, no works were conducted.

(3)

License held by Tomusinsky Open Pit, a subsidiary of Southern Kuzbass Coal Company.

 

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The table below summarizes ROM coal production of our Southern Kuzbass mines by mine and type of coal for the periods indicated.

 

   2020  2019  2018 

Mine

  Tonnes   % of Total
Production
  Tonnes   % of Total
Production
  Tonnes   % of Total
Production
 
   (In millions of tonnes)(1) 

Coking Coal

          

Sibirginsky Open Pit

   1.5     1.7     0.3   

Tomusinsky Open Pit

   0.5     0.5     0.4   

V.I. Lenina Underground

   0.4     0.4     0.6   

Sibirginskaya Underground

   0.9     0.4     0.5   

Olzherassky Open Pit

   1.2     1.3     0.7   
  

 

 

    

 

 

    

 

 

   

Total Coking Coal

   4.5    43.7  4.3    49.4  2.5    36.2
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Steam Coal

          

Krasnogorsky Open Pit

   2.6     1.8     1.6   

Sibirginsky Open Pit

   0.8     0.5     0.1   

Olzherassky Open Pit

   0.0     0.0     0.0   

Olzherasskaya-Novaya Underground

   0.0     0.7     0.8   

Tomusinsky Open Pit

   0.4     0.3     0.4   
  

 

 

    

 

 

    

 

 

   

Total Steam Coal

   3.8    36.9  3.3    36.8  2.9    42.0
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Anthracite

          

Krasnogorsky Open Pit

   2.0     1.2     1.5   

Sibirginsky Open Pit

   —       —       —     

Olzherassky Open Pit

   —       —       —     

Olzherasskaya-Novaya Underground

   —       —       —     

Tomusinsky Open Pit

   —       —       —     
  

 

 

    

 

 

    

 

 

   

Total Anthracite

   2.0    19.4  1.2    13.8  1.5    21.8
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Total Coal

   10.3    100  8.8    100  6.9    100
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1)

Volumes are reported on a wet basis.

 

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The table below sets forth Southern Kuzbass mines’ coal sales volumes by type of coal and destinations for the periods indicated.

 

Coal Type

  Region 2020   2019   2018 
     (In thousands of tonnes) 

Coking coal

  Asia  752.9    554.8    461.4 
  Russia  1,075.7    1,013.6    146.4 
   

 

 

   

 

 

   

 

 

 

Total

    1,828.6    1,568.4    607.8 

Anthracite

  Europe  557.2    361.3    729.3 
  Asia  490.8    171.8    177.9 
  Russia  6.4    8.1    46.4 
  CIS  0.0    0.0    11.1 
  Middle East(1)  0.0    6.4    0.0 
   

 

 

   

 

 

   

 

 

 

Total

    1,054.4    547.6    964.7 

PCI

  Asia  1,757.0    1,287.7    1,217.3 
  Middle East(1)  83.0    129.3    20.2 
  Europe  11.2    0.0    0.0 
   

 

 

   

 

 

   

 

 

 

Total

    1,851.2    1,417.0    1,237.5 

Steam coal

  Asia  49.8    456.3    598.9 
  Europe  5.5    85.1    22.8 
  Russia  0.2    3.0    13.3 
  Middle East(1)  116.1    0.0    0.0 
   

 

 

   

 

 

   

 

 

 

Total

    171.6    544.4    635.0 
   

 

 

   

 

 

   

 

 

 

Total

    4,905.8    4,077.4    3,445.0 
   

 

 

   

 

 

   

 

 

 

 

(1)

Includes Turkey only.

Coal washing plants

We operate five coal washing plants and one processing unit in Russia. Four of these coal washing plants and one processing unit are located near our coal mines in Southern Kuzbass. One coal washing plant is located near Neryungrinsky Open Pit in Yakutia.

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 33% 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 2020, our washing plants enriched 15.2 million tonnes of our coal feedstock.

 

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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, Coke 25-40 mm, Coke nut 10-25 mm, Coke breeze 0-10 mm, Coal benzene, Coal tar, Coke gas

Mechel Coke

  Coke +40 mm, Coke +25 mm, Coke 25-40 mm, Coke nut 10-25 mm, Coke breeze 0-10 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) of low-ash, low-phosphorus and low-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 as by-products in the coke production process.

The table below summarizes our production of coke, chemical products and coke gas for the periods indicated.

 

   2020   2019   2018 
   

(Coke and chemical products in

thousands of tonnes)

(Coke gas in millions of cubic meters)

 

Mechel Coke

      

Coke (6% moisture)

   2,031    2,014    2,040 

Chemical products

   125    116    109 

Coke gas

   652    720    744 

Moscow Coke and Gas Plant

      

Coke (6% moisture)

   696    601    542 

Chemical products

   31    32    29 

Coke gas

   308    261    235 

Total

      

Coke (6% moisture)

   2,727    2,615    2,582 
  

 

 

   

 

 

   

 

 

 

Chemical products

   156    148    138 
  

 

 

   

 

 

   

 

 

 

Coke gas

   960    981    979 
  

 

 

   

 

 

   

 

 

 

The table below summarizes our sales volumes of coke and chemical products for the periods indicated.

 

   2020   2019   2018 
   (In thousands of tonnes) 

Coke

   933    945    697 

Chemical products

   136    136    131 

 

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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 2020   Capacity Utilization
Rate in 2020
  Planned Increase
(2021-2023)
 
   (In thousands of tonnes) 

Coke (6% moisture)

   756    92.1  —   

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 2020   Capacity Utilization
Rate in 2020
  Planned Increase
(2021-2023)
 
   (In thousands of tonnes) 

Coke (6% moisture)

   2,862    70.9  —   

Our own production facilities purchase a substantial majority of our coke production. For the years ended December 31, 2020, 2019 and 2018, purchases of our coke by our own production facilities amounted to 1.7 million tonnes, 1.6 million tonnes and 1.7 million tonnes, respectively, which represented 65%, 63% and 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. Our 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. In 2011-2012, Yakutugol obtained three subsoil licenses 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 Sivaglinskoye iron ore deposits due to our failure to meet operational deadlines under the subsoil licenses. We challenged this decision of Rosnedra, and in October 2020 the court of the first instance declared it illegal. Rosnedra appealed, but the court of appeal upheld the decision of the court of the first instance. In February 2021, Rosnedra filed a cassation appeal, the hearing of which is scheduled for April 26, 2021.

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

Korshunovsky Open Pit

 LOGO  03333 LOGO  (Korshunovsk) 4.3  Open pit   Dec 2026  In production  1965  Lease

Rudnogorsky Open Pit

 LOGO  03334 LOGO (Rudnogorsk) 5.3  Open pit   Jan 2028  In production  1984  Ownership

 

(1)

“In production” refers to sites that are currently producing iron ore.

 

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The table below summarizes our ROM iron ore and iron ore concentrate production for the periods indicated.

 

   2020  2019  2018 

Mine

  Tonnes   Grade
(% Fe)
  Tonnes   Grade
(% Fe)
  Tonnes   Grade
(% Fe)
 
   (In millions of tonnes)(1) 

Korshunovsky Open Pit

   3.4    22.7  3.2    24.8  3.6    23.4

Rudnogorsky Open Pit

   3.6    30.5  3.3    34.0  3.2    27.8

Total ore production

   7.0    26.7  6.5    29.4  6.8    25.5
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

Iron ore concentrate production

   2.1    62.4  2.5    62.7  2.0    62.8
  

 

 

   

 

 

  

 

 

   

 

 

  

 

 

   

 

 

 

 

(1)

Volumes are reported on a wet basis.

Yakutugol holds the subsoil license for the Sutamskaya iron ore area in South Yakutia. The Sutamskaya area is located 210 kilometers south-east of Neryungri. This deposit contains high-quality iron ore, which will allow production of iron ore concentrate with 65% iron content.

The table below sets forth certain information regarding the subsoil license for our Yakutugol iron ore deposit.

 

Deposit

 

License (plot)

 Area
(sq. km)
 Mining
Method
  License
Expiry
Date
  Status Year
Production
Commenced
  Surface
Land Use
Rights

Sutamskaya area

 LOGO  03158 LOGO
(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

  2020   2019   2018  2020  2019  2018 
   (In thousands of tonnes)(1)  (% of total sales,
including intra-group)
 

Coking coal concentrate

   3,960.5    3,987.8    3,816.2   70.4  69.4  69.9

Steam coal and middlings

   2,875.2    2,616.3    3,215.0   71.5  81.6  84.7

PCI and Anthracite

   2,905.6    1,965.0    2,205.5   94.1  91.3  91.7

Iron ore concentrate

   38.8    192.7    139.8   1.8  7.5  7.1

Coke

   933.1    945.2    696.6   35.5  37.4  28.5

Chemical products

   135.5    135.7    130.8   87.9  91.4  95.8

 

(1)

Includes resale of mining segment products purchased from third parties.

 

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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 26 to the consolidated financial statements.

 

   2020  2019  2018 

Product

  Amount  % of
Revenues
  Amount  % of
Revenues
  Amount  % of
Revenues
 
   (In millions of Russian rubles, except for percentages) 

Coking coal concentrate

   24,975.8   35.2  35,462.5   42.5  39,998.3   45.4

Domestic Sales

   20.5   20.3   19.4 

Export

   79.5   79.7   80.6 

Steam coal

   3,288.7   4.7  5,107.2   6.1  4,852.5   5.5

Domestic Sales

   40.3   23.9   26.5 

Export

   59.7   76.1   73.5 

PCI and Anthracite

   18,740.2   26.4  15,767.3   18.9  19,687.1   22.3

Domestic Sales

   0.3   0.5   2.3 

Export

   99.7   99.5   97.7 

Middlings

   7,319.8   10.3  6,180.9   7.4  6,766.9   7.7

Domestic Sales

   19.7   11.1   68.6 

Export

   80.3   88.9   31.4 

Coke

   12,722.5   18.0  15,195.8   18.2  11,243.6   12.8

Domestic Sales

   24.8   30.2   22.3 

Export

   75.2   69.8   77.7 

Chemical products

   2,060.2   2.9  2,774.1   3.3  2,961.5   3.4

Domestic Sales

   76.4   72.9   65.8 

Export

   23.6   27.1   34.2 

Iron ore concentrate

   412.8   0.6  1,179.0   1.4  838.9   0.9

Domestic Sales

   100.0   100.0   100.0 

Export

   0.0   0.0   0.0 

Other(1)

   1,361.1   1.9  1,849.9   2.2  1,755.0   2.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   70,881.1   100.0  83,516.7   100.0  88,103.8   100.0
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Domestic Sales

   20.1   21.5   22.9 

Export

   79.9   78.5   77.1 

 

(1)

Includes revenues from transportation, distribution, construction and other miscellaneous services provided to local customers.

Marketing and distribution

In 2020, 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.

 

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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)

  2020  2019  2018 

Asia

   60.1  60.8  57.1

Russia

   20.1  21.5  22.9

Europe

   11.7  13.0  14.1

CIS

   3.0  2.4  2.6

Middle East(2)

   5.1  2.3  3.3

Other

   0.0  0.0  0.0
  

 

 

  

 

 

  

 

 

 

Total

   100.0  100.0  100.0
  

 

 

  

 

 

  

 

 

 

 

(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 only.

The following table sets forth information about the five largest customers of our mining segment, which together accounted for approximately 34.2% of our total mining segment sales in 2020.

 

Customer

  % of Total
Mining Segment
Sales
  

Product

  % of Total
Products
Sales
 

POSCO

   12.8 Coking coal concentrate   20.0
   PCI and Anthracite   21.9

Sojitz Corporation

   9.5 Coking coal concentrate   22.3
   PCI and Anthracite   6.1

Nippon Steel Corporation

   4.4 PCI and Anthracite   13.8
   Coking coal concentrate   2.2

ArcelorMittal

   3.8 PCI and Anthracite   14.3

MMK

   3.7 Coking coal concentrate   10.3
   Iron ore concentrate   9.4

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 2020, our largest domestic customer for our coking coal concentrate was MMK, accounting for 10.3% of our total coking coal concentrate sales and 3.6% 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 RUB 1,103.6 million in 2020. In total, 580.7 thousand tonnes of steam coal was sold within our group in 2020. SUE HCS Sakha Republic (Yakutia) is our largest domestic customer of steam coal, accounting for 26.0% of our total steam coal sales and 1.2% of our total mining segment sales in 2020.

 

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We ship our iron ore concentrate by rail directly from our Korshunov Mining Plant to customers. In 2020, 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 64.5% of our total coke sales (including intra-group sales) by volume in 2020. Major third-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 54 open cars and leases 10,670 open cars, 140 pellet cars and 331 dumpcars. In 2020, Mecheltrans transported domestically approximately 20.8 million tonnes of our cargo, approximately 76.0% of which was comprised of coal and iron ore feed.

Export sales

We export coking coal concentrate, PCI and anthracite, steam coal and coke and chemical products.

In 2020, the largest foreign customer of our mining segment was POSCO, accounting for 12.8% of our total mining segment sales. POSCO purchases consisted of PCI and coking coal concentrate.

We were Russia’s second largest exporter of coking coal concentrate in 2020, according to MMI and our estimates. Our exports of coking coal concentrate went primarily to Japan, China and South Korea in 2020. In 2020, Sojitz Corporation, POSCO, Shanghai Runhe International Trade Co., Ltd, Kobe Steel and Capella Group Co., Limited were our largest foreign customers of coking coal concentrate, accounting for 55.6% of our total coking coal concentrate sales and 19.6% of our total mining segment sales. Shipments are generally made by rail to seaports and further by sea, except for certain shipments to northeast China that are made only by rail.

In 2020, our exports of PCI and anthracite were primarily to South Korea, Europe, Japan and China, which together accounted for 91.8% of our total PCI and anthracite sales and 24.3% of our total mining segment sales. In 2020, our largest foreign customers of PCI and anthracite were POSCO, ArcelorMittal, Nippon Steel Corporation, Dongseo E & C Co., Ltd. and Sojitz Corporation.

In 2020, our exports of steam coal were primarily to China, Turkey and Vietnam, which together accounted for 57.5% of our total steam coal sales and 2.7% of our total mining segment sales. In 2020, our largest foreign customers of steam coal were Unicarbon Limited, LG International, Capella Group Co., Limited, Pacific Minerals Limited and China Asia Enterprise Pte. Ltd.

PCI, anthracite and steam coal are shipped to customers from our warehouses by rail and further by sea.

In 2020, we used annual contracts for export sales of coal. Coal not shipped under annual contracts was sold on the spot market.

In 2020, we exported coke, including coke breeze, and chemical products primarily to Europe, which accounted for 21.1% of our total coke and chemical products sales and 4.4% of our total mining segment sales.

From Port Posiet, we shipped primarily coking coal concentrate, steam coal and PCI to Japan, South Korea and China in 2020. In 2020, our Port Posiet processed approximately 5.6 million tonnes of coal with its warehousing capacity limited to 140 thousand tonnes for one-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. We further envisage the construction of a deepwater berth and an approach channel, as well as the installation of a

 

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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 2020, Mecheltrans transported for export approximately 9.1 million tonnes of our cargo, approximately 86.2% of which was comprised of coal.

Market share and competition

Coal

According to the Central Dispatching Department, in 2020, the Russian coal mining industry was represented by 179 companies, which operated 58 underground mines and 121 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 68% of the overall coal production volume in 2020.

According to data from the Central Dispatching Department, from companies’ websites and from our estimates, in 2020, we were the second largest coking coal producer in Russia, with an 11.7% share of total coking coal production by volume, and we had a 4.3% market share with respect to overall Russian coal production by volume. The following table lists the main Russian coking coal producers in 2020, 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
 

EVRAZ plc

  

UCC Yuzhkuzbassugol JSC

   11,355    12.8
  

Raspadskaya PAO

   9,263    10.5
  

EVRAZ Total

   20,618    23.3

Mechel PAO

  

Yakutugol JSHC

   5,064    5.7
  

Southern Kuzbass Coal Company PJSC

   4,515    5.1
  

Elgaugol OOO(1)

   835    0.9
  

Mechel Total

   10,414    11.7

Severstal PAO

  

Vorkutaugol AO

   10,261    11.6

UMMC-Holding Corp

  

UMMC (CC Kuzbassrazrezugol AO)

   7,082    8.0

CC Kolmar LLC

  

GOK Denisovskiy JSC

   4,677    5.2
  

GOK Inaglinskiy JSC

   1,573    1.8
  

Kolmar Total

   6,250    7.0

Other

     34,041    38.4
    

 

 

   

 

 

 

Total

     88,666    100.0
    

 

 

   

 

 

 

 

Source:

Central Dispatching Department, companies’ websites and our estimates.

 

(1)

We disposed of the Elga coal complex in April 2020. See “Item 5. Operating and Financial Review and Prospects — Business Structure — Recent acquisitions and disposals.”

According to Metal Expert, in 2020, our share of Russia’s total production volume of steam coal was 2.3%. The main producers in the Russian steam coal industry include SUEK, UMMC (Coal Company Kuzbassrazrezugol) and SDS-Coal, accounting for 53.8% of total steam coal production in 2020, 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

 

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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 69.6% of total iron ore concentrate production. According to Metal Expert, we were seventh in production volume in 2020 with 2.1 million tonnes of iron ore concentrate, representing 2.0% 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, 2020. 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 on life-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 2023 through 2038. 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

 

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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” and “— Regulatory Matters — Subsoil Licensing in Russia.”

As of December 31, 2020, we had coal reserves totaling 692.5 million tonnes, of which approximately 43% was coking coal. The table below summarizes our coal reserves as of December 31, 2020.

 

Company

  Proved Reserves(1)   Probable Reserves(1)   Total   % in Open Pit 
   (In thousands of tonnes) 

Yakutugol

   170,846    555    171,401    100.0

Southern Kuzbass Coal Company

   496,037    25,103    521,140    78.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   666,883    25,658    692,541    84.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Reserves include adjustments for loss and dilution modifying factors.

The table below summarizes our reserves by coal type as of December 31, 2020.

 

Company

  Category   Coking Coal   Steam Coal   Anthracite   Lignite   Total(1) 
   (In thousands of tonnes) 
   Proved    81,579    6,856    0    82,411    170,846 
   Probable    263    292    0    0    555 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Yakutugol

   Total    81,842    7,148    0    82,411    171,401 
   Proved    196,305    192,061    107,671    0    496,037 
   Probable    18,529    6,471    103    0    25,103 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Southern Kuzbass Coal Company

   Total    214,834    198,532    107,774    0    521,140 
   Proved    277,884    198,917    107,671    82,411    666,883 
   Probable    18,792    6,763    103    0    25,658 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     296,676    205,680    107,774    82,411    692,541 
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2020.

 

Mine

  Proved Reserves   Probable Reserves   Total(1)(2)   Heat Value(3)   % Sulfur 
   (In thousands of tonnes)   (In kcal/kg)     

Neryungrinsky Open Pit(4)(5)

   86,726    555    87,281    8,794    0.11 - 0.30 

Kangalassky Open Pit(5)

   82,411    0    82,411    6,834    0.40 

Dzhebariki-Khaya Open Pit(5)

   1,709    0    1,709    7,500    0.23 
  

 

 

   

 

 

   

 

 

     

Total

   170,846    555    171,401     
  

 

 

   

 

 

   

 

 

     

 

(1)

Reserves reported on a wet in-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: $87 per tonne (FCA basis) for coking coal concentrate and $34 per tonne (FCA basis) for raw steam coal.

(3)

Heat value is reported on a moisture- and ash-free basis.

 

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(4)

Mined coking coal is processed at Neryungrinskaya Washing Plant with a weighted average yield of coking coal concentrate of 52%.

(5)

Steam coal is sold as ROM without processing.

The table below sets forth reserves attributable to our Southern Kuzbass mines as of December 31, 2020.

 

Mine

  Proved
Reserves
   Probable
Reserves
   Total(1)(2)(3)(4)   Heat
Value(5)
   % Sulfur 
   (In thousands of tonnes)   (In kcal/kg) 

Krasnogorsky Open Pit

   183,767    194    183,961    8,100    0.33 

Olzherassky Open Pit

   50,932    5,963    56,895    8,363    0.30 

Tomusinsky Open Pit

   4,949    3,654    8,603    8,430    0.30 

Sibirginsky Open Pit

   161,783    45    161,828    8,470    0.30 

Sibirginskaya Underground

   37,434    4,024    41,458    8,491    0.29 

V.I. Lenina Underground

   26,200    11,223    37,423    8,606    0.40 

Olzherasskaya-Novaya Underground

   30,972    0    30,972    7,887    0.18 

Olzherasskaya-Glubokaya Underground (prospect)(6)

   —      —      —      —      —   

Usinskaya Underground (prospect)(6)

   —      —      —      —      —   
  

 

 

   

 

 

   

 

 

     

Total

   496,037    25,103    521,140     
  

 

 

   

 

 

   

 

 

     

 

(1)

Reserves reported on a wet in-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): $92 per tonne for coking coal concentrate, $48 per tonne for anthracite, $43 per tonne for PCI and $13 per tonne for raw steam coal.

(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 70%, 65%, 80%, 22% and 44%, respectively.

(5)

Heat value is reported on a moisture- and ash-free basis.

(6)

Not considered in the review because these prospects presently do not have mine plans.

As of December 31, 2020, we had iron ore reserves (proved and probable) totaling 126.7 million tonnes at an average iron grade of 26.8%. The table below summarizes iron ore reserves by mine as of December 31, 2020.

 

Mine

  Proved
Reserves
   Probable
Reserves
   Total(1)(2)(3)   Grade (Fe%)(4) 
   (In thousands of tonnes) 

Korshunovsky Open Pit

   48,510    26,981    75,491    24.1 

Rudnogorsky Open Pit

   29,410    21,807    51,217    30.7 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   77,920    48,788    126,708    26.8 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Reserves reported on a wet in-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 $88 per tonne (FCA basis) for iron ore concentrate.

(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 of 31%.

 

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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, ropes, stampings and forgings, structural shapes, beams and rails. Within these product groups, we are further able to tailor various steel grades to meet specific end-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 3.6 million tonnes in 2020, 3.6 million tonnes in 2019 and 3.9 million tonnes in 2018. Our ferrosilicon production amounted to 66.7 thousand tonnes in 2020, 66.9 thousand tonnes in 2019 and 76.1 thousand tonnes in 2018.

Description of key products

Pig iron. Pig iron is an iron alloy with carbon content typically 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 products. 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. We offer our customers a wide selection of long products produced from various steel grades at Chelyabinsk Metallurgical Plant, Izhstal and 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 a made-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 processed from wire rod and are ready for use in manufacturing and consumer applications. Our wire products are manufactured at Beloretsk Metallurgical Plant, Vyartsilya Metal

 

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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; 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 three types of ferrosilicon: with 45%, 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

  2020   2019   2018 
   (In thousands of tonnes) 

Pig Iron

   3,529    3,326    3,690 

Semi-Finished Steel Products, including:

   838    862    953 

Carbon and Low-Alloyed Semi-Finished Products

   826    850    943 

Long Steel Products, including:

   2,321    2,293    2,538 

Stainless Long Products

   11    11    11 

Alloyed Long Products

   29    26    30 

Rebar

   1,026    1,047    1,200 

Rails

   288    280    245 

Structural Shapes

   477    415    455 

Wire Rod

   160    159    219 

Low-Alloyed Engineering Steel

   330    355    377 

Flat Steel Products, including:

   323    323    318 

Stainless Flat Products

   12    17    6 

Carbon and Low-Alloyed Flat Products

   311    306    312 

Forgings, including:

   39    39    49 

Stainless Forgings

   1    1    1 

Alloyed Forgings

   27    26    33 

Carbon and Low-Alloyed Forgings

   11    12    15 

Stampings

   39    108    143 

Wire Products, including:

   504    529    577 

Wire

   466    475    526 

Ropes

   32    35    42 

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. In 2020, approximately 75% of the world’s steel output was made in BOFs, according to Wood Mackenzie.

 

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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. In 2020, approximately 25% of the world’s steel output was made in EAFs, according to Wood Mackenzie.

Steel products are broadly subdivided into two categories — flat and long products. Flat products are hot-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 management system with the requirements set by the International Organization for Standardization (“ISO”). For example, the main manufacturing processes at Chelyabinsk Metallurgical Plant, Izhstal, Beloretsk Metallurgical Plant and Urals Stampings Plant are ISO 9001:2015 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 long and flat carbon and stainless steel products, rail and structural 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.

 

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Chelyabinsk Metallurgical Plant’s principal production lines include a BOF workshop equipped with three converters; an EAF workshop equipped with EAF of 100 tonnes; four sintering machines and three blast furnaces; five concasting machines; a blooming mill for 200-320 millimeter billets; five long products rolling mills for 6.5-190 millimeter round bars and 75-200 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; a hot-rolled flat products workshop equipped with a thick sheet continuous rolling mill for hot-rolled sheets of various properties of up to 2,000 millimeters wide and up to 40 millimeters thick and a semi-continuous rolling mill for up to 1,500 millimeters wide and up to 6 millimeters thick hot-rolled coils; a cold-rolled flat products workshop for 0.3-4 millimeter thick cold-rolled stainless sheet. 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 2020
   Capacity
Utilization
Rate in 2020
  Planned
Increase
(2021-2023)
 
   (In thousands of tonnes, except for percentages) 

Sintering

   4,811    87.4  —   

Pig iron

   4,162    84.8  —   

Steelmaking

   4,495    77.0  —   

Rolling

   5,173    59.3  —   

Chelyabinsk Metallurgical Plant produced approximately 3.5 million tonnes of raw steel and approximately 3.1 million tonnes of rolled products, of which 287.8 thousand tonnes were rail products in 2020.

The universal rail and structural rolling mill is our main construction project initiated in 2008 at Chelyabinsk Metallurgical Plant that was launched in July 2013. 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. 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. Five certificates of conformity of the Customs Union and one 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 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 up to 400 thousand tonnes of rails 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.

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 for 100-220 millimeter billets; two medium-sized long products rolling mills for structural shapes, 30-180 millimeter round bars, 30-90 millimeter square bars, bands and hexagonal bars; and one continuous small sort wire mill for 5.5-29 millimeter round, 12-28 millimeter square and 12-27 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.

 

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Production Area

  Capacity
in 2020
   Capacity
Utilization
Rate in 2020
  Planned
Increase
(2021-2023)
 
   (In thousands of tonnes, except for percentages) 

Steelmaking

   350    54.4  —   

Rolling

   648    54.9  —   

Wire products

   13    4.1  —   

Izhstal produced approximately 190.2 thousand tonnes of raw steel, 356.1 thousand tonnes of rolled products (of which, 351.6 thousand tonnes were long products) and 0.5 thousand tonnes of wire products in 2020.

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 of 5.5-13.5 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 2020
   Capacity
Utilization
Rate in 2020
  Planned
Increase
(2021-2023)
 
   (In thousands of tonnes, except for percentages) 

Rolling

   591    77.9  —   

Wire products

   600    69.5  —   

Beloretsk Metallurgical Plant produced a total of 416.9 thousand tonnes of wire products in 2020. Rolled products production in 2020 amounted to a total of 460.7 thousand tonnes, of which 399.9 thousand tonnes were further processed into wire products and 60.8 thousand tonnes constituted the output volume of wire rod for third-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 and nails. 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, 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 2020
   Capacity
Utilization
Rate in 2020
  Planned
Increase
(2021-2023)
 
   (In thousands of tonnes, except for percentages) 

Wire products

   81    69.6  —   

 

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Vyartsilya Metal Products Plant produced 56.4 thousand tonnes of wire products in 2020.

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, 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 include 1.5-25 tonne swages and hydraulic 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 2020
   Capacity
Utilization
Rate in 2020
  Planned
Increase
(2021-2023)
 
   (In thousands of tonnes, except for percentages) 

Stampings and forgings

   297    26.6  —   

Urals Stampings Plant produced 79.1 thousand tonnes of special steel stampings and forgings in 2020.

Mechel Nemunas

Mechel Nemunas is a Lithuanian wire products plant located in Kaunas that produces hard-drawn, annealed, calibrated 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 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 2020
   Capacity
Utilization
Rate in 2020
  Planned
Increase
(2021-2023)
 
   (In thousands of tonnes, except for percentages) 

Wire products

   82    37.1  —   

Mechel Nemunas produced 30.4 thousand tonnes of wire products in 2020.

Bratsk Ferroalloy Plant

Bratsk Ferroalloy Plant is the largest enterprise in Eastern Siberia producing high-grade ferrosilicon. Ferrosilicon is used in the steelmaking 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; or as a reducing agent for the production of nonferrous metals and alloys. Approximately 5-6 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 two ore-thermal furnaces with a capacity of 25 megavolt-amperes (“MVA”) and two ore-thermal furnaces with a capacity of 33 MVA. We commenced commercial operations of two ore-thermal furnaces with a capacity of 33 MVA in the second quarter of 2013 and 2020,

 

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respectively. 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 2020
   Capacity
Utilization
Rate in 2020
  Planned
Increase
(2021-2023)
 
   (In thousands of tonnes, except for percentages) 

Ferrosilicon (65% silicon content in the alloy)

   92.2    87.2  —   

Bratsk Ferroalloy Plant produced 66.7 thousand tonnes of ferrosilicon with 45%, 65% and 75% silicon content in the alloy in 2020.

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.

 

  2020  2019  2018 

Product

 Amount  % of
Revenues
  Amount  % of
Revenues
  Amount  % of
Revenues
 
  (In millions of Russian rubles, except for percentages) 

Pig Iron

  260.7   0.2  76.3   0.0  133.1   0.1

Semi-Finished Steel Products, including:

  181.1   0.1  137.0   0.1  54.4   0.0

Carbon and Low-Alloyed Semi-Finished Products

  165.0   0.1  88.6   0.1  8.5   0.0

Long Steel Products, including:

  98,907.7   59.3  97,692.2   55.9  105,722.0   56.3

Stainless Long Products

  1,726.1   1.0  2,703.1   1.6  2,698.1   1.4

Other Long Products

  51,944.2   31.1  50,045.9   28.6  50,871.9   27.1

Rebar

  41,665.0   25.0  42,268.0   24.2  48,000.2   25.6

Wire Rod

  3,572.4   2.2  2,675.2   1.5  4,151.8   2.2

Flat Steel Products, including:

  23,055.7   13.8  23,371.5   13.4  22,786.2   12.1

Stainless Flat Products

  3,608.6   2.2  4,025.0   2.3  1,382.3   0.7

Carbon and Low-Alloyed Flat Products

  19,447.1   11.6  19,346.5   11.1  21,403.9   11.4

Forgings, including:

  3,414.0   2.0  3,212.9   1.8  3,976.6   2.1

Stainless Forgings

  403.0   0.2  427.0   0.2  810.4   0.4

Other Forgings

  3,011.0   1.8  2,785.9   1.6  3,166.2   1.7

Stampings

  5,036.7   3.0  11,604.7   6.6  11,871.1   6.3

Wire Products, including:

  25,971.3   15.6  27,086.4   15.5  30,040.4   16.0

Wire

  16,364.6   9.8  17,417.8   10.0  19,589.8   10.4

Ropes

  3,467.1   2.1  3,532.8   2.0  3,916.5   2.1

Other Wire Products

  6,139.6   3.7  6,135.8   3.5  6,534.1   3.5

Steel Pipes

  3,380.4   2.0  3,281.4   1.9  3,230.2   1.7

Ferrosilicon

  3,159.4   1.9  3,228.5   1.8  3,927.0   2.1

Other

  3,517.7   2.1  5,159.5   3.0  6,176.7   3.3
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  166,884.7   100.0  174,850.4   100.0  187,917.7   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)

  2020  2019  2018 

Russia

   68.8  71.0  69.7

Europe

   16.3  15.7  16.9

CIS

   13.0  11.1  11.5

Asia

   1.6  1.9  1.6

Middle East(2)

   0.1  0.1  0.1

Other

   0.1  0.1  0.1

United States

   0.1  0.1  0.1
  

 

 

  

 

 

  

 

 

 

Total

   100.0  100.0  100.0
  

 

 

  

 

 

  

 

 

 

 

(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 99.1% of the total steel segment sales to Middle East in 2020. We did not have any direct sales to Iran and Syria in 2020, and we have no plans to make such direct sales in the future.

In 2020, the five largest customers of our steel products were Russian Railways (long steel products and wire products), EVRAZ (long steel products, flat steel products, wire products and pipes), Metallservice AO (long steel products, flat steel products and wire products), Steel Industrial Company AO (long steel products, flat steel products, wire products, pipes and forgings) and TH Regionpromservice OOO (wire products, long steel products and flat steel products), which together accounted for 12.3% of our total steel segment sales.

In 2020, the five largest customers of ferrosilicon were Mitsui & Co., Severstal, NLMK, Torex-Khabarovsk OOO and RUSAL, which together accounted for 1.7% of our total steel segment sales.

The majority of our steel segment export sales are made to end users in non-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 further on-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 be re-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 2020.

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

 

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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 26 to the consolidated financial statements.

 

Product

  2020  2019  2018 
   (In millions of Russian
rubles, except for percentages)
 

Pig Iron

   260.7   76.3   133.1 

Domestic Sales

   100.0  100.0  100.0

Export

   0.0  0.0  0.0

Semi-Finished Steel Products

   181.1   137.0   54.4 

Domestic Sales

   100.0  100.0  65.7

Export

   0.0  0.0  34.3

Long Steel Products

   98,907.7   97,692.2   105,722.0 

Domestic Sales

   86.7  88.8  87.9

Export

   13.3  11.2  12.1

Flat Steel Products

   23,055.7   23,371.5   22,786.2 

Domestic Sales

   88.3  86.5  84.4

Export

   11.7  13.5  15.6

Forgings

   3,414.0   3,212.9   3,976.6 

Domestic Sales

   43.2  48.2  56.7

Export

   56.8  51.8  43.3

Stampings

   5,036.7   11,604.7   11,871.1 

Domestic Sales

   97.0  94.7  91.1

Export

   3.0  5.3  8.9

Wire Products

   25,971.3   27,086.4   30,040.4 

Domestic Sales

   87.6  86.6  82.5

Export

   12.4  13.4  17.5

Steel Pipes

   3,380.4   3,281.4   3,230.2 

Domestic Sales

   93.5  93.2  93.4

Export

   6.5  6.8  6.6

Ferrosilicon

   3,159.4   3,228.5   3,927.0 

Domestic Sales

   29.9  39.9  49.5

Export

   70.1  60.1  50.5

Other

   3,517.7   5,159.5   6,176.7 

Domestic Sales

   97.2  98.5  86.8

Export

   2.8  1.5  13.2
  

 

 

  

 

 

  

 

 

 

Total

   166,884.7   174,850.4   187,917.7 
  

 

 

  

 

 

  

 

 

 

Domestic Sales

   85.8  87.3  85.4

Export

   14.2  12.7  14.6

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.

 

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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)
 

Semi-Finished Steel Products

  0.0  0.1  10.2  0.0  0.1  0.0  89.6

Long Steel Products

  18.4  31.6  9.8  3.5  4.2  14.0  18.5

Flat Steel Products

  8.5  30.5  37.7  4.9  2.2  0.1  16.1

Forgings

  0.0  76.3  6.5  15.5  1.1  0.0  0.6

Stampings

  0.0  16.9  0.1  13.0  68.0  0.0  2.0

Wire Products

  14.1  44.3  19.3  1.9  1.8  4.2  14.4

Steel Pipes

  10.4  67.7  11.3  1.2  0.1  0.2  9.1

 

(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 partnerships with the end users of our products. As part of our end-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 2020, 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 53 storage sites in 39 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 2020, Mechel Service sold 1.2 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 in non-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.

 

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Our production facilities supply high-quality 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 steel products to manufacturing and service companies on a walk-in basis.

In 2020, 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 Belgium, Germany, Turkey, Kazakhstan, Ukraine, China, Brazil, Malaysia, Poland and Uzbekistan. 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 80.6% of overall domestic crude steel output in 2020, 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 21.1% of the volume of Russian commodity steel production in 2020. NLMK produces flat products (hot-rolled and cold-rolled), galvanized products and slabs, as well as long products. The company’s production facilities are located in Lipetsk (NLMK), in the Sverdlovsk region (long products producer NLMK-Ural and wire products producer NLMK-Metalware) and in the Kaluga region (long products producer NLMK-Kaluga). NLMK exported 54.1% of its steel products in 2020. Domestically, NLMK’s largest customers are in the construction and oil and gas industries, followed by companies in the automotive sector. NLMK also controls iron ore producer Stoilensky GOK and coke producer Altai-Koks.

 

  

EVRAZ plc (“EVRAZ”), which includes Russian steel producers EVRAZ NTMK and EVRAZ ZSMK, is Russia’s second largest steel manufacturer by volume, accounting for 16.6% of the volume of Russian commodity steel products output in 2020. EVRAZ focuses on the production of long products, including rebar, wire rod and profiled rolled products (such as rails, beams, channels and angles). EVRAZ exported 62.0% of its output in 2020. EVRAZ also controls iron ore producers EVRAZ KGOK and Evrazruda, as well as coking coal producers UCC Yuzhkuzbassugol, Raspadskaya and Mezhegeyugol.

 

  

Severstal PAO (“Severstal”) is Russia’s third largest steel manufacturer by volume, accounting for 15.8% of the volume of Russian commodity steel products output in 2020. 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 31.0% of Russia’s total flat products output in 2020. Domestic sales of flat products accounted for 62.4% of Severstal’s output in 2020, with the oil and gas industry

 

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and automotive sector as its leading customers. Severstal controls coal producer Vorkutaugol and iron ore producers Karelsky Okatysh and Olenegorsky GOK, which satisfy a portion of Severstal’s coking coal and iron ore requirements.

 

  

Magnitogorsk Iron & Steel Works PAO (“MMK”) is Russia’s fourth largest steel manufacturer by volume, accounting for 15.1% of the volume of Russian commodity steel products output (including long products, flat products and semi-finished products) in 2020. MMK’s product mix is comprised mostly of flat products, which accounted for 83.6% of its commercial steel products output (including semis) in 2020. Domestically, MMK controls a significant portion of the supplies to the oil and gas and automotive sectors. MMK exported 26.9% of its output in 2020. Its production facilities are located in Magnitogorsk in the southern Urals. MMK also controls coking coal producer Belon.

 

  

Metalloinvest Holding Company AO (“Metalloinvest”), whose Russian assets consist of Oskol Electrometallurgical Plant AO (“OEMK”) and Ural Steel AO, had a 7.0% share by volume of Russian commodity steel products output in 2020. OEMK produces long products only, and Ural Steel produces both long and flat products. Metalloinvest exported 66.7% of its commodity steel production in 2020. The company’s production facilities are located in the Central and Urals Federal Districts of Russia. Metalloinvest also controls Russia’s largest iron ore and pellets production facilities Lebedinsky GOK and Mikhailovsky GOK.

 

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 third largest and most comprehensive producer of special steel and alloys in Russia, accounting for 11.6% of total Russian special steel output by volume in 2020, 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 Russian non-special steel long products category, our primary products and our market position by production volume in 2020 were as follows, according to Metal Expert:

 

  

Reinforcement bars (“rebar”) — In rebar, we compete in the 6-40 millimeters range. In 2020, the largest domestic rebar producers were NLMK (20.5%), EVRAZ (15.3%), Abinsk Electric Steel Works OOO (“AESW”) (15.0%), Mechel (11.7%), Severstal (5.1%) and MMK (4.8%).

 

  

Wire rod — There were six major producers of wire rod in Russia in 2020: AESW (22.7%), Mechel (20.8%), MMK (14.5%), NLMK (14.4%), EVRAZ (10.7%) and Severstal (10.6%).

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 (tool, high-speed and stainless long steel) in 2020, producing 7.2% of the total Russian output by volume, and we held significant shares of Russian production volumes in 2020 of stainless long products (20.1%), tool steel (28.2%) and high-speed steel (47.7%).

The following tables set forth additional information regarding our 2020 market share in Russia for various categories of steel products.

 

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All long products (excluding square billets)

 

Manufacturer

  Production   Market Share
by Production
Volume
 
   (In thousands of tonnes, except for percentages) 

EVRAZ

   4,984    24.5

Mechel

   2,679    13.1

NLMK

   2,331    11.4

AESW

   2,182    10.7

MMK

   1,728    8.5

Severstal

   1,086    5.3

Metalloinvest

   910    4.5

Other

   4,477    22.0
  

 

 

   

 

 

 

Total

   20,377    100.0
  

 

 

   

 

 

 

 

Source: Metal Expert.

Long products — Wire rod(1)

 

Manufacturer

  Production   Market Share
by Production
Volume
 
   (In thousands of tonnes, except for percentages) 

AESW

   733    22.7

Mechel

   674    20.8

MMK

   470    14.5

NLMK

   465    14.4

EVRAZ

   347    10.7

Severstal

   342    10.6

Other

   205    6.3
  

 

 

   

 

 

 

Total

   3,236    100.0
  

 

 

   

 

 

 

 

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
 
   (In thousands of tonnes, except for percentages) 

NLMK

   1,817    20.5

EVRAZ

   1,352    15.3

AESW

   1,332    15.0

Mechel

   1,033    11.7

Severstal

   454    5.1

MMK

   424    4.8

Other

   2,444    27.6
  

 

 

   

 

 

 

Total

   8,856    100.0
  

 

 

   

 

 

 

 

Source: Metal Expert.

 

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Flat stainless steel

 

Manufacturer

  Production   Market Share
by Production
Volume
 
   (In thousands of tonnes, except for percentages) 

VMZ Red October

   13.4    49.4

Mechel

   12.3    45.5

Other

   1.4    5.1
  

 

 

   

 

 

 

Total

   27.1    100.0
  

 

 

   

 

 

 

 

Source: Metal Expert.

Wire products

 

Manufacturer

  Production   Market Share
by Production
Volume
 
   (In thousands of tonnes, except for percentages) 

Severstal-Metiz

   540.2    20.1

Mechel

   467.1    17.4

MMK-Metiz

   426.7    15.9

NLMK-Metalware

   258.7    9.7

EVRAZ

   220.4    8.2

Other

   768.6    28.7
  

 

 

   

 

 

 

Total

   2,681.7    100.0
  

 

 

   

 

 

 

 

Source: Metal Expert.

Wire products — High-tensile wire

 

Manufacturer

  Production   Market Share
by Production
Volume
 
   (In thousands of tonnes, except for percentages) 

Severstal-Metiz

   46.4    50.7

Mechel

   27.2    29.6

MMK-Metiz

   18.1    19.7
  

 

 

   

 

 

 

Total

   91.7    100.0
  

 

 

   

 

 

 

 

Source: Metal Expert.

According to Metal Expert, Bratsk Ferroalloy Plant is the fourth largest Russian producer of ferrosilicon by volume. In 2020, we had a 13.3% 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 50.8% market share by production volume in 2020. Kuznetsk Ferroalloys also produces microsilica and quartzite. It is primarily export-oriented, having exported 87.2% of its ferrosilicon production volume in 2020.

 

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Chelyabinsk Electrometallurgical Plant AO (“ChEMK”) is the second largest Russian ferrosilicon producer, with a 15.9% market share by production volume in 2020. In addition, it produces ferrochrome, silicomanganese and silicocalcium. In 2020, ChEMK exported 58.3% by volume of its ferrosilicon production.

 

  

Yurginsk Ferroalloy Plant AO (“Yurginsk Ferroalloy Plant”) is the third largest Russian ferrosilicon producer, with a 15.0% market share by production volume in 2020. Yurginsk Ferroalloy Plant also produces microsilica. It is export-oriented, having exported 98.0% of its ferrosilicon production volume in 2020.

The following table sets forth additional information regarding our 2020 ferrosilicon market share in Russia.

 

Manufacturer

  Region   Production   Market Share
by Production
Volume
 
   (In thousands of tonnes, except for percentages) 

Kuznetsk Ferroalloys

   Kemerovo    272.1    50.8

ChEMK

   Chelyabinsk    85.4    15.9

Yurginsk Ferroalloy Plant

   Kemerovo    80.6    15.0

Bratsk Ferroalloy Plant

   Irkutsk    71.3    13.3

NLMK

   Lipetsk    26.8    5.0
    

 

 

   

 

 

 

Total

     536.2    100.0
    

 

 

   

 

 

 

 

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 2020, our steelmaking operations used 5.3 million tonnes of iron ore feed, approximately 28% in the form of pellets and 72% in the form of sinter, and we internally sourced approximately 40% of our total iron ore feed requirements. In 2020, Korshunov Mining Plant supplied our steel segment with 2.1 million tonnes of iron ore concentrate. In 2020, we purchased most of the remaining part of our iron ore feed from Russian suppliers such as Kachkanarsky GOK, Kovdorsky GOK, Kostomukshsky GOK, Lebedinsky GOK and Mikhailovsky GOK under monthly and annual contracts on market terms.

We process coking coal concentrate into coke at Mechel Coke and Moscow Coke and Gas Plant. In 2020, our production facilities used 3.5 million tonnes of coking coal concentrate (including 2.6 million tonnes used by Mechel Coke and 0.9 million tonnes used by Moscow Coke and Gas Plant), and 61% 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 2020, we produced and internally used approximately 1.8 million tonnes of coke as well as produced for sale to third parties another approximately 0.9 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 2020, our limestone production amounted to 1.7 million tonnes.

We produce 91.3% of steel in BOFs. In steelmaking, ferrous scrap and waste are used in the composition of feedstock, and we are approximately 92% self-sufficient in this raw material, which amounts to 744.8 thousand tonnes, sourcing the balance from various scrap traders.

In 2020, our production facilities used 23.5 thousand tonnes of ferrosilicon (including 19.7 thousand tonnes at Chelyabinsk Metallurgical Plant, 1.7 thousand tonnes at the Chelyabinsk branch of Urals Stampings Plant and 2.1 thousand tonnes at Izhstal), all of which was supplied by Bratsk Ferroalloy Plant.

 

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Steelmaking requires significant amounts of electricity to power EAFs, ladle furnaces and rolling mills and to produce sinter. In 2020, our steel segment operations consumed approximately 3.0 billion kWh of electricity. Chelyabinsk Metallurgical Plant, Moscow Coke and Gas Plant and Urals Stampings Plant have power co-generation facilities, which produce electricity for internal consumption. Overall, our group consumed approximately 4.2 billion kWh of electricity in 2020. 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 are by-products of our steelmaking and coke-chemical operations, and natural gas, which we purchase from third parties. In 2020, we consumed 1.9 billion cubic meters of blast furnace gas, 792.6 million cubic meters of coke gas and 760.4 million cubic meters of natural gas. In 2020, Southern Kuzbass Power Plant consumed approximately 1.1 million tonnes of steam coal and middlings sourced from our own coal mining assets.

Large amounts of water are also required in the production of steel. Water serves as a re-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% of its water needs from recirculated water and the rest from a local river. Izhstal sources 89% of its water needs from recirculated water, 8% from recycled water and the rest from a storage reservoir. Beloretsk Metallurgical Plant sources 76% 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 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

In July 2018, the European Union introduced a system of import 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 for certain product categories, quotas are set for different countries. Our steel products supplied to the European Union are subject to these quotas. During the period from July 1, 2020 to June 30, 2021, the quota for the product category that includes beams produced by Chelyabinsk Metallurgical Plant for Russia amounts to 24.5 thousand tonnes, and the quota for the product category that includes rolled products produced by Izhstal for Russia amounts to 246.4 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 April 2014, following an expiry review, the antidumping duty was extended for another five years. A further expiry review initiated by the European Commission in April 2019 resulted in the extension of the antidumping duty of 17.8% imposed on exports to the European Union of ferrosilicon produced by Bratsk Ferroalloy Plant for a period of another five years until July 1, 2025 from July 2, 2020.

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

 

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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. In 2018-2019, temporary exploration conditions of the southern area of the Uvatskoye deposit were approved. Currently, a pilot batch of quartzite is being developed 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 electricity and heat energy made from our steam coal, and to maintain the power self-sufficiency of our mining and steel 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.

 

   2020   2019   2018 
   (In million kWh) 

Electricity

   3,151.2    3,395.3    3,250.6 

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 2020, the plant generated 1,599.4 million kWh of electricity and 639.7 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 are supplied to it mostly from local sources, including our Southern Kuzbass Coal Company. In 2020, it consumed approximately 1.1 million tonnes of steam coal and middlings sourced from Southern Kuzbass Coal Company.

 

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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
2020 (million kWh)
 

VK-50-2 LMZ

   1950    April 1951    53    179.7 

VK-50-2 LMZ

   1950    November 1951    53    110.5 

VK-50-2 LMZ

   1950    August 1952    53    160.9 

VK-50-2 LMZ

   1952    February 1953    53    168.7 

T-115-8,8 LMZ

   1996    December 2003    113    247.3 

T-88/106-90 LMZ

   1953    July 1954    88    363.5 

VK-50-2 LMZ

   1954    December 1954    53    128.7 

T-88/106-90 LMZ

   1953    September 1956    88    240.1 
      

 

 

   

 

 

 

Total

       554    1,599.4 
      

 

 

   

 

 

 

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 2020 amounted to approximately 9.5 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 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’s sales amounted to approximately 3.4 billion kWh of electricity purchased in the wholesale and retail electricity markets and 3.6 million Gcal of heat energy in 2020.

 

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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. See “Item 3. Key Information — Risk Factors — Risks Relating to Our Business and Industry — 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 RUB 36.1 billion for 2021-2023. Our capital investment program is primarily targeted at expanding the mining segment and increasing the efficiency of the steel segment, including, inter alia, investments of approximately RUB 22.9 billion in mining and approximately RUB 9.6 billion 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 invest approximately RUB 6.6 billion in 2021-2023 for the development of facilities and equipment of Southern Kuzbass Coal Company.

The steel segment projects are mainly targeted at modernization of production facilities in order to improve their efficiency. Major projects include the reconstruction of oxygen-converter production at Chelyabinsk Metallurgical Plant, which comprises modernization of three converters (two converters were modernized in 2009-2016), and the modernization of steel-wire-rope production with installation of new drawing equipment at Beloretsk Metallurgical Plant.

 

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The table below sets forth the major items of our capital expenditures by segment and facility for 2021-2023 (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
 
   (In millions of Russian rubles) 

Mining Segment

        

Maintenance expenditures

  Maintaining current coal and iron ore mining and coal and iron ore concentrate production   16,279    2021    2023 

Steel Segment

        

Maintenance expenditures

  Maintaining current output capacity   7,079    2021    2023 

Chelyabinsk Metallurgical Plant

        

Reconstruction of oxygen-converter production

  Increase of cast weight to 152 tonnes   6,105    2009    2023 

Beloretsk Metallurgical Plant

        

Modernization of steel-wire-rope production

  Installation of new drawing equipment   1,427    2016    2023 

Power segment

        

Maintenance expenditures

  Maintaining current output capacity   1,904    2021    2023 

Transport division

        

Maintenance expenditures

  Maintaining current output capacity   803    2021    2023 

Port Posiet

        

Technical modernization of Port Posiet

  Increase of cargo-handling capacity to 9.0 million tonnes per annum   4,617    2009    2023 

 

(1)

We estimate that approximately RUB 1,711 million of planned expenditures were spent on the aforementioned projects in 2020. In 2020, we spent RUB 4,378 million in total on capital expenditures.

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 (five employees) and a Production and Technical Department at Mechel Mining Management (four employees). In December 2008, we established Mechel Engineering (161 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 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; and (6) computer simulation of coal and ore deposits.

In the course of our research and development, we also contract with third-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 135 employees involved in the improvement of existing technologies and products.

 

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Our research and development expenses in the years ended December 31, 2020, 2019 and 2018 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

 

  

comply with all applicable laws and regulations and when practicable, strive to exceed those requirements.

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

 

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agreements, Chelyabinsk Metallurgical Plant and Bratsk Ferroalloy Plant are obliged to reduce the level of pollutants emission into the atmosphere by 20%, as well as to reduce the discharge of waste water into the Miass River in approximately three times 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 a I-IV hazard class;

 

  

the handling of industrial explosives;

 

  

operation of explosive and fire and chemically hazardous production facilities of a I-III hazard class;

 

  

fire control and security;

 

  

medical operations;

 

  

mine surveying;

 

  

loading and unloading operations;

 

  

transportation activities;

 

  

collection, processing, storage and sale of ferrous and non-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, power sales activity related to the sale of electricity in the retail electricity market is subject to compulsory licensing since July 1, 2021. 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

 

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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 and 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 a non-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) a lump-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 Subsoil Law-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 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%. Since 2021, the mineral extraction tax is calculated using a rental coefficient, which amounts to 1 or 3.5, depending on the extracted mineral. For coal, the rental coefficient

 

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amounts to 1, for iron ore it can be either 1 or 3.5, depending on the fulfillment of certain conditions. We apply the rental coefficient of 3.5 for iron ore. In 2020, mineral extraction taxes amounted to RUB 1,183 million, which are included in the consolidated statement of profit (loss) and other comprehensive income 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 to non-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.

 

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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 — 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.

 

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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.

 

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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 amendments, starting from 2020, fees for negative environmental impact exceeding statutory limits are charged using multiplying coefficients. 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, 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 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 of non-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.

 

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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 25 times) and the highest fees are imposed for pollution exceeding such limits (above-limit fees; exceed the fees within the statutory standards or individually approved temporary limits by 100 times). Above-limit fees for the disposal of industrial and consumer waste exceed the fees within the statutory limits by 25 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 2020, we incurred above-limit fees and penalties in Russia in the amount of approximately RUB 265.9 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.

 

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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 environmental requirements can result in a suspension of mining operations.

Reclamation

We conduct our reclamation activities for land damaged by production in accordance with the 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 potentially fertile soil rocks 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 2020, we incurred reclamation costs in Russia of approximately RUB 46 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. Russia ratified the Paris Agreement and it came into force 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 legal entities conducting business and other activities in Russia. In 2018, the Ministry of Economic Development of the Russian 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 remains at the stage of development, and it is hard to predict when it would be adopted into a law.

Technical Regulations

We are subject to various technical regulations and standards which apply to industrial manufacturing businesses. The Federal Law No. 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

 

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processes, including technical regulations, standards and certification. It was expected that these rules or technical regulations would replace the previously adopted state standards (the so-called GOSTs). Currently, national and interstate standards which would standardize technical regulations are being developed. However, considerable 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), where equipment operating under excessive pressure is used 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, alloys 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 low hazardous and class I being extremely 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 must be registered with the state register with the assignment of an appropriate hazard class. All hazardous production facilities at our operations are registered with the state register of hazardous production facilities.

Any construction, reconstruction, liquidation, conservation or other activities in relation to regulated industrial sites is subject to an industrial safety review. Any deviation from project documentation in the process of construction, reconstruction or liquidation of industrial sites is prohibited. Changes made to the project documentation for the construction and reconstruction of a hazardous production facility are subject to a project documentation review in accordance with Russian legislation on urban planning. Changes made to the documentation for the conservation and liquidation of a hazardous production facility are subject to an industrial safety review.

The Safety Law provides for the creation of an industrial safety management system at operations of I and II hazard classes, which includes identification, analysis and prediction of the accident risk at the facility.

A company that operates a hazardous production facility of I and II hazard classes must develop an industrial safety declaration, a document which reflects a comprehensive assessment of the accident risk and the associated threat, including an analysis of the adequacy of the measures taken to prevent accidents, as well as to

 

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localize and eliminate the consequences of an accident at the hazardous production facility. The industrial safety declaration must be approved by the chief executive officer of the company and submitted to the territorial office of Rostekhnadzor for inclusion in the register.

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, create systems to cope with and notify the authorities of accidents and maintain these systems in good working order. Companies are also required to conduct a special assessment of working conditions to identify harmful factors in their workplaces.

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 mandatory pre-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 (or one-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 and two-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 and non-industrial buildings, constructions, premises and parts thereof or constructions in progress) and/or intangible assets of an entity which are located in Russia if the balance sheet value of such assets exceeds 20% of the total balance sheet value of the core production and intangible assets of such entity, or obtaining rights to determine the conditions of business activity of a Russian entity or to exercise the powers of its executive body by a person (or its group), or an acquisition by a person (or its group) of more than 50% of the voting shares (interests) of a foreign entity, which has supplied goods, works and/or services to Russia in an amount exceeding RUB 1 billion in the preceding year, or other rights to determine the conditions of business activity of such entity or to exercise the powers of its executive body, if, in any of the above cases, the aggregate asset value of an acquirer and its group together with a target and its group (excluding the asset value of the seller and its group, if as a result of the acquisition the seller and its group cease to determine the conditions of business activity of the target) exceeds RUB 7 billion and at the same time the total asset value of the target and its group exceeds RUB 400 million, or the total annual revenues of such acquirer and its group, and the target and its group for the preceding calendar year exceed RUB 10 billion and at the same time the total asset value of the target and its group exceeds RUB 400 million;

 

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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, or total annual revenues of such entities (or groups of persons to which they belong) for the preceding calendar year exceed RUB 10 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, 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; 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, or total annual revenues of such entities (or groups of persons to which they belong) for the preceding calendar year exceed RUB 10 billion.

The above requirements for a mandatory pre-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 or spin-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 RUB 150,000 to RUB 250,000 for the failure to file a FAS post-transactional notification and from RUB 300,000 to RUB 500,000 for the failure to file an application for FAS pre-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);

 

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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 for non-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 RUB 300,000 to RUB 1 million 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 revenue from sale of all goods, works and services in the market where such violation was committed, but not more than 2% of total revenue from sale of all goods, works and services in case of abuse of a dominant position and not more than 4% of total 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 compulsory split-up or spin-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.”

 

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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 in Rossiyskaya 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.

In accordance with amendments to the Strategic Industries Law that entered into force in July 2020, control of a foreign investor over a Strategic Company will also be deemed to exist if the foreign investor is able, directly or through third parties, to determine decisions made by the Strategic Company at the general meeting of shareholders (participants) by disposing of votes attributable to voting shares (stakes) constituting the charter capital of such Strategic Company, provided that this ability is temporarily transferred to another person (other persons) on the basis of an agreement on the fiduciary management of assets, pledge agreement, repo agreement, security payment, other agreement or transaction.

 

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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 a buy-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 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

 

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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:

 

  

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.

Since January 1, 2019, the retirement age in the Russian Federation is 65 years for males and 60 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.

 

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Salary

In accordance with Russian law, the minimum salary in Russia is RUB 12,792 per month starting from January 1, 2021.

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;

 

  

monitor redundancy of employees and seek action by municipal authorities to delay or suspend mass 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;

 

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protection from disciplinary punishment or dismissal on the initiative of the employer without prior consent of the management of the trade union and, in certain circumstances, the consent of the relevant trade union association;

 

  

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.

 

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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 Non-profit Partnership Market Council. Association Non-profit 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, power sales activity is subject to compulsory licensing since July 1, 2021. 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 are so-called non-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. In non-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 for mid-scale and end-consumer energy trades.

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 Non-profit 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 effectively take-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

 

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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 at non-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 under non-regulated contracts, on the “one-day-ahead” spot market or on the balancing market. All terms of electricity supply under non-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; (3) the prices for electricity transmission and distribution through electricity networks; and (4) the prices of services of infrastructure organizations.

Since July 1, 2021, power sales activity in the retail electricity market is subject to compulsory licensing.

Heat market

Heat markets are regional retail markets. The market is divided into heat energy in hot water and heat energy 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.

Item 4A. Unresolved Staff Comments

None.

 

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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 3. Key Information — Risk Factors” 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 26 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 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.

 

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The table below sets forth by segments our key mining, steel and power subsidiaries, presented in chronological order by date of acquisition/date of incorporation.

 

Name

  Location of
Assets
   Product/Business   Date Control
Acquired/Date of
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

Steel Segment

        

Chelyabinsk Metallurgical Plant

   Russia    
Semi-finished products,
long and flat steel products

 
   December 2001    93.7

Vyartsilya Metal Products Plant

   Russia    Wire products    May 2002    93.3

Beloretsk Metallurgical Plant

   Russia    
Long steel products, wire
products

 
   June 2002    
91.4
% 
 

Urals Stampings Plant

   Russia    Stampings and forgings    April 2003    90.0

Mechel Nemunas

   Lithuania    Wire products    October 2003    100.0

Izhstal

   Russia    
Long steel products, semi-
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 sales    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, 2020. Some of our Russian subsidiaries have preferred shares outstanding that have voting rights similar to the common shares rights if dividends on those shares have not been paid. We have calculated voting interests by including these preferred shares for subsidiaries where dividends have not been paid.

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, 2020:

 

  

The mining segment supplied approximately 40% of the steel segment’s iron ore feed requirements, 100% of the steel segment’s coke requirements and 100% 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 its day-to-day operations; and

 

  

Our co-generation facilities supplied approximately 28% of our group’s overall electricity requirements.

 

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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 the period-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

There were no significant acquisitions or disposals during 2018-2020, save as disclosed below.

Disposal of the Elga coal complex

In January 2020, we entered into negotiations relating to disposal of the Elga coal complex to a perspective buyer as further development of the asset required substantial amount of investment and we were limited in our ability to attract new financing. Our stake in the Elga coal complex comprised of a 50.9990202673% stake in Elgaugol OOO, the owner of the subsoil license for the Elga coal deposit, a 51% stake in Elga-road OOO, the owner of the Ulak-Elga rail line, and a 51% stake in MecheltransVostok OOO, the rail line’s transport operator. On April 30, 2020, we closed the sale of the Elga coal complex to A-Property OOO for a consideration of RUB 89 billion used for partial repayment of our indebtedness and deleveraging.

Disposal of the Elga coal complex was recognized as a discontinued operation in our consolidated financial statements and results of operations of the Elga coal complex were excluded from continuing operations and were reported as discontinued operations for the period ended December 31, 2020 and prior periods. See note 25 to the consolidated financial statements.

Factors Affecting Our Results of Operations and Financial Condition

Our results of operations are affected by a variety of factors, including, but not limited to, the 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 steelmaking 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

 

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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 3.0% in 2018, 2.3% in 2019 and contracted by 4.3% in 2020, according to World Bank. According to Rosstat, Russia recorded GDP growth of 2.8% in 2018, 2.0% in 2019 and GDP decline of 3.1% in 2020. In 2018, geopolitical tensions heightened resulting in increased competition of global economic systems and trade wars. In 2019, global economic growth slowed, while world trade tensions intensified. In 2020, the coronavirus had a significant impact on the economy, slowing down the development and growth of the global economy, which in turn resulted in negative indicators for the year.

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 consolidation trends in mining and steel industries in 2020 were largely affected by various complications and restrictions related to COVID-19, ongoing trade tensions and geopolitical instability. Strategic investors seeking growth through acquisitions were predominant players in the M&A market. We believe that measures taken to stimulate the economy and 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

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), according to CRU. The spot price averaged $206 per tonne (FOB Australia) in 2018, according to CRU. In the first half of 2019, spot metallurgical coal prices remained generally above $200 per tonne (FOB Australia). The strength in 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

 

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dragged seaborne coking coal prices down, and by the end of the year, restrictions on coal imports at Chinese ports further escalated the downward pressures on metallurgical coal prices. Thus, premium hard coking coal spot price fell significantly to $134 per tonne in December 2019, according to CRU. The average contract price in 2019 was $185 per tonne (FOB Australia), 10.6% lower than the average contract price in 2018, according to 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 quarter of 2020, coking coal spot prices were staying above $150 per tonne (FOB Australia) as COVID-19 caused coal supply disruptions in China. In June 2020, premium hard coking coal spot price fell to $111 per tonne (FOB Australia) as Chinese domestic coal output recovered and the rest of the world demand tumbled down due to COVID-19, according to CRU. In October 2020, China imposed a ban on coal imports from Australia and premium hard coking coal spot price fell to $102 per tonne (FOB Australia) in December 2020, according to CRU. The average contract price in 2020 was $126 per tonne (FOB Australia), 32% lower than the average contract price in 2019, according to CRU. The spot price averaged $123 per tonne (FOB Australia) in 2020, which was 31% lower than the average spot price in 2019, according to CRU.

In 2018, slowing economic growth, most importantly in China, has negatively impacted power demand and coal stocks have been extremely high in coastal provinces of China. This allowed the Chinese government to stringently restrict coal imports at the end of the year. Steam coal spot prices declined from $92 per tonne (5,500 NAR CFR China) in the first quarter of 2018 to $75 per tonne (5,500 NAR CFR China) in the fourth quarter of 2018, and the average price in 2018 was $82 per tonne (5,500 NAR CFR China), according to CRU. Steam coal spot prices fell from $69 per tonne (5,500 NAR CFR China) in the first quarter of 2019 to $63 per tonne (5,500 NAR CFR China) in the third quarter of 2019, according to CRU. Such price dynamics were caused by multiple factors, such as mild weather, a slowdown in Chinese power demand growth, coal phase-out policies in the EU, combined with lower gas prices. The average price in 2019 was $65 per tonne (5,500 NAR CFR China), 20% lower than the average price in 2018, according to CRU. In 2020, steam coal spot prices fell from $64 per