Steppe Cement Regulatory News (STCM)

9 June 2023

Steppe Cement Ltd

CEO STATEMENT

Overall, the cement market in Kazakhstan remained stable in 2022 compared with the historical high achieved during 2021 and on a per capital level, the consumption for the 2022 year of 630 kg per capita is consistent with that which should be expected based on actual GDP and the anticipated GDP growth rate.

The Kazak cement market remained stable at 11.6 million tonnes, with sales volume by Steppe Cement decreasing by 1% year on year, due mostly to logistical problems in the railway system in the third and fourth quarters. The blend of this was that domesticl sales increased by 4% and exports reduced to virtually zero.

Imports into Kazakshtan decreased by 25% to 0.6 million tonnes, being equivalent to 5% of the total market, with these coming mostly from Russia. Exports from local producers decreased again by 33% to 1.1 million tonnes, with these being mostly to Uzbekistan and Kyrgystan as new capacity has been commisioned in Uzbekistan. Exports remain concentrated to the Tashkent and Bishkek areas.

The market demand in 2023 has shown a decrease in the first quarter due to weather conditions, logistics and persistant high inflation and we expect the market to improve in the coming quarters. High interest rates will slow down the mortgage market but the economy remains strong driven by commodities.

During 2021 and 2022 the government implemented incentives which helped the construction industry, particularly the ability to withdraw part of the individual pension funds and use them for real estate acquisitions. The development of the main cities continues, and the rate of urbanization is estimated to grow from the current 59% to 69% in the next 25 years. The banks are actively promoting long term mortgages and the program has been very successful.

The political unrest at the beginning of 2022 as well as the conflict in Ukraine have brought higher inflation and more populist policies. After a phase of salary increases to compensate for inflation, the government seems to be committed to lowering inflation.

In 2022, Steppe Cement posted a net profit of USD17.9 million while EBITDA remained stable at USD31 million. Higher pricing compensated for the increase in costs and slightly lower volumes. Steppe Cement's average cement selling prices increased by 12% in KZT and 4% in USD, to USD52 per tonne delivered.

Steppe Cement operated both lines at 86% of their current combined capacity (which is 1.1 million tonnes for line 5 and 0.85 million tonnes for line 6).

Shareholders' funds remained stable at USD65.1 million after the dividend distribution USD12.6 million to shareholders (5 UK pence per share).

Production and costs

Line 5 produced 60% 995,933 tonnes of cement while Line 6 produced 663,955 tonnes.

Line 5 performed at 90% capacity as it was limited by roller maintenance while Line 6 was limited by reliability. In 2023 we expect higher production from Line 6 and similar in Line 5.

Cost per tonne increased by 20% in KZT at slightly higher pace than inflation. The average cash production cost of clinker increased from USD20/tonne to USD23/tonne while cement cash cost increased from USD23/tonne to USD26/tonne in 2022. The cost of production increased by 20% in local currency in line with inflation of 18.8% year on year. The devaluation of the currency was limited to 8%.

Despite the increase of transportation costs, selling expenses, reflecting mostly cement delivery costs, were reduced to USD6.6/tonne as we focused in markets closer to the factory.

General and administrative expenses we reduced to USD6.4 million from USD6.7 million in 2021 due to cost control measures.

On 31 March 2023 the company had 799 employees a similar level to 2022.

In 2022, finance costs remained stable at USD 1 million. Without operating lease interest of USD0.2 million under IFRS 16, the finance cost was USD0.8 million, mostly interest on loans.

Other income of USD2.4 million reflects the write-back of receivables previously written down and the write-back of deferred income from the government subsidied loans.

The factory receives an allocation CO2 emissions from the government and does not trade them as they are at a level similar to historical production. There is a very limited market for alternative fuels and the increase in additives in the cement is not yet accepted beyond certain levels.

Capital investment increased significantly in 2022 but it will be limited going forward

Capital investment was accelerated to USD10 million to complete the work started in 2021 and to compensate for the slow down in investment during 2019 and 2020 due to COVID19. Apart from the traditional maintenance capex and purchase of key spares for USD3 million per year, we managed to complete a significant number of projects in 2022:

- New FL Smith close circuit separator for cement mill number 1 with an investment of USD3.6 million. The mill capacity was increased by 30%, slag content can be increased to 25%, power consumption has been reduced and the quality and stability has improved

- A similar separator for cement mill number 2,. The project was started and USD1.5 million was spent in 2022. Commissioning will be done between the winter 2023 and spring 2024.

- Replacement of one reducer for one cement mill at a cost of USD 0.9 million

- Bucket crane revamping to support summer sales USD 0.3 million

- Online monitoring of main stack emissions to comply with ecological requirements USD0.15 million

- Coal dosing system to improve feeding reliability

- High tension drive motors to maintain key spares

- Additional gas analyzer for kiln system to maintain clinker stability

Those projects were financed by USD4.3 million in subsidized loans and USD 3.5 million from internal cash flow.

We have plans for a further USD4 million investment in 2023 and the first quarter of 2024 including:

- Complete the new separator for cement mill 2 for USD 2 million

- Preheater raiser duct extension by 24 meters to improve the preheater calcination in line 6

- Software upgrades to the ABB control system at a cost of USD0.7 million to allow further automatisation of the factory and prevent obsolescence

- Engineering of raw mill 3 separator conversion to dynamic separator to support the increase in production of line 6 by 10% when completed

- Upgrades to bag filters to improve maintenance and future enviroment requirements

The government has announced that the subsidized credit lines will be limited as the focus shifts to the control of inflation. We will try to complete the remaining capex planned with our cash flow to avoid borrowings at commercial KZT rates as much as possible.

Financial position: New debt will be limited as interest rates in Kazakhstan have increased to 20% per annum in 2023

During the year, our total loans outstanding were stable at USD6.7 million versus USD5.6 million in 2021. The loans had good subsidized rates in KZT but the renewal will be most likely made at near commercial rates and the company has an incentive to reduce the borrowing in 2023. The company ended the year with net debt of USD2.6 million, excluding IFRS 16 leases.

Long-term loans were increased from USD3.2million to USD5.4million while short term loans were reduced from USD 2.3 to USD 1.3million. 

Despite the politically unstable environment in Kazakhstan at the beginning of the year, the unpredictable situation in the region and the surge in inflation, the KZT had only an 8% devaluation against the USD and an average exchange rate of 461 vs 426 in 2021.

We maintain short term credit lines available as stand by:

- KZT 1 billion short term in a government subsidized program in KZT at 6% per annum, but it will difficult to renew

- KZT 2 billion from Halyk Bank at 6% p.a. in USD or 20% in KZT.

Depreciation of property, plant and equipment decreased to USD6.1 million in 2022 due to devaluation

Steppe Cement's effective income tax rate was 20% consistent with last year.

Javier del Ser PerezChief Executive Officer

Annual Report 2022 and Annual General Meeting 

Steppe Cement will release its Annual Report 2022 on its web site at www.steppecement.com during the week commencing 20th June 2023. The Company's Annual General Meeting is expected to take place at its Malaysian Office at Suite 10.1, 10th Floor, West Wing, Rohas Perkasa, 8 Jalan Perak, Kuala Lumpur Malaysia on Wednesday, 12th July 2023 at 4 p.m.

Steppe Cement's AIM nominated adviser and broker is RFC Ambrian Limited.

Nominated Adviser contact: Stephen Allen or Andrew Thomson on +61 8 9480 2500.

Broker contact: Charlie Cryer at +44 20 3440 680

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF PROFIT OR LOSS

FOR THE YEAR ENDED 31 DECEMBER 2022

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2022

.

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF FINANCIAL POSITION

AS OF 31 DECEMBER 2022

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF FINANCIAL POSITION

AS OF 31 DECEMBER 2022 (CONTINUED)

Company No. LL04433

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2022

* Attributable to the shareholders of the Company

Company No. LL04433

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2022 (CONTINUED)

* Attributable to the shareholders of the Company

Company No. LL04433

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2022

Company No. LL04433

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2022

Company No. LL04433

STEPPE CEMENT LTD

(Incorported in Labuan FT, Malaysia under Labuan Companies Act, 1990)

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2022 (CONTINUED)