Steppe Cement Regulatory News (STCM)

11 Sep 2015 07:00

Steppe Cement Ltd

Interim Results for the Half Year 30 June 2015

and General Market Update

1. Interim Results

Steppe Cement Ltd ("Steppe Cement" and "the Company") posted a consolidated loss after tax of USD2.2 million for the six months ended 30 June 2015.

· Sales increased by 1% in volume but decreased by 9% in Tenge ("KZT"). However, as a consequence of the continuous devaluation of the KZT against the USD, the turnover in USD decreased by 14%.

· The average ex-factory price decreased from 10,797 KZT /tonne to 9,665 KZT /tonne or 10% during the period. The decrease was caused by the competition from Russian companies helped by the Rouble exchange rate and the reaction of the main local factories to keep their market shares. This situation evolved in line with the variations in exchange rate.

· Despite the lower selling price, Steppe Cement's gross margin increased slightly from 29% to 30% due to the lower cost of operation from running only the dry lines. Excluding depreciation, cash gross margin increased more markedly from 36 to 43%.

· Selling expenses per tonne decreased by 13% in USD as sales to Astana increased and the new fleet of wagons was fully utilized decreasing rent expenses.

· General and administrative expenses decreased by 17% during the period or 6% if the provision for stocks is excluded.

· The company booked foreign exchange losses of USD0.7 m in the first half compared with USD5.1 million in 1H 2014.

· Despite the lower price environment and flat sales Steppe Cement generated USD7.3 million from operations before working capital changes in 1H 2015 compared to USD6.4 million in 1H 2014. This is mostly the consequence of lower production cost and tight control over expenses across the board. In addition receivables were reduced and payables increased in a concerted effort to maximize liquidity of the company. Cash was kept in USD as a hedge against a potential KZT devaluation, while complying with the requirements of all loan ratios.

· The Kazakhstan economy is expected to grow at 3% in 2015.

· Inflation has been maintained below 2% during 2015 but it is expected to increase in the coming months due to devaluation.

· On 20 August 2015, the KZT was allowed to float and it sharply depreciated 30% from 188 KZT/USD to 240 KZT/USD. There is no current trading band for the KZT and its future evolution will be tied to the oil price as well as the Rouble KZT exchange rate. The company had, at the time of the devaluation, a net exposure of USD23 million in foreign loans.

2. Production, wagons and cost cutting measures

· All production is now coming from the dry lines as the wet lines are mothballed.

· Production costs per tonne decreased by 12% in KZT (or 21% excluding depreciation)

· Line 5 is currently able to produce 3,000 tonnes of clinker per day and its cash cost per tonne is 16% lower than line 6 mostly due to energy savings.

· Line 6 is able to produce 2,400 tonnes per day.

· All of the new 330 railway wagons purchased in 2014 for cement transportation have been placed into operation. The total amount of debt related to the wagons outstanding as of end of June was USD13 million with USD2.2 million in principal payments payable yearly.

· As the remaining wagons required by Steppe are not used year round, we have decided not to use the additional loan of USD15 million available from VTB to purchase additional units. We will continue to rent during the summer season.

· Significant efforts continued to be made to optimize utilities (water, heating, compressed air and electricity) as well as general expenses (headquarter, headcount and security). The effects of these savings will be reflected in the second half.

3. Update on the Kazakh cement market

· The Kazakh cement market increased by 10% during the first half of the year. Steppe Cement expects a market of 9.4 million tonnes for the full year 2015 from 8.5 million in 2014.

· Steppe Cement decreased its market share from 19% in 1H2014 to 17% in 1H2015 as we chose to maintain a significant stock of clinker. We will recover some of the market share during the 2H as we have sold most of our stock in the third quarter.

· Imports into Kazakhstan have grown by 8% in 2015 in light of the weakness of the Russian Rouble and despite the new cement factory that opened in the west of Kazakhstan. Imports remain at 12% market share, similar to last year.

· Overall production of all factories in Kazakhstan has increased by 10% in 1H 2015 due a new factory commissioned (5%), increased productivity and faster use of clinker in stock when compared to 2014.

· Exports from Kazakhstan now represent 1.5% of local production down from 6% a year ago. The relative strength of the Kazakh Tenge has forced the companies to sell almost all production locally.

· Currently 62% of production in the country is coming from dry lines and 38% from wet lines.

· Prices have increased in the second half as the factories have mostly run out of clinker stock and they are working at maximum capacity. For the rest of the year the cement price will depend on the demand / supply balance and the exchange rate with the Russian Rouble.

· The Kazakhstan Government has continued its road building plan as well as the works in the International Exhibition to be held in Astana in 2017.

4. Financing

· The debt position of the company on 30 June 2015 comprised:

o A VTB Bank loan of USD22 million at 6.2% interest. A USD5.5 million principal payment was made in July 2015 and the Company retains a holding of USD5.5 million in cash to meet the USD5.5 million principal repayment due in November 2015. The remaining USD11 million is repayable during 2016;

o A long term USD13 million loan outstanding to VTB Bank for the purchase of the wagons and repayable monthly till March 2019 at 7.2% and secured with the pledge of the wagons; and

o A 1.45 billion Kazak Tenge bond outstanding for redemption in November 2017.

· We have maintained KZT3.7 billion of available working capital lines from Halyk Bank and Altyn Bank.

· On 19 June 2015 Steppe's operating subsidiaries signed a loan agreement with Halyk Bank JSC subsidised by government programs. The loan comes at a fixed interest rate of 6% per annum and is available for drawdown over the year to 19 June 2016. The loan totals 2,188 million KZT, and comprises of:

o 500 million KZT for 5 years working capital on revolving basis.

o 1,688 million KZT for capital investment of which

§ 1,188 million KZT have 2 years grace for principal and 8 years repayment

§ 500 million KZT with no grace period and 10 years repayment.

· The loan will be used to partly replace the current working lines and for the capex requirements of 2015 and 2016 mostly in cement milling, utilities, packing and logistics.

· Steppe Cement will not pay a dividend in this calendar year and will use the available cash flow to pay down mostly USD denominated debt.

A pdf copy of the announcement and the full interim financial statements is available on the company's website at www.steppecement.com.

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

Nominated Adviser: Contact Stephen Allen or Oliver Morse at +61 8 94802500.

Broker: Contact Charlie Cryer at +44 20 3440 6800

SUMMARY OF INTERIM FINANCIAL STATEMENTS

FOR THE PERIOD ENDED 30 JUNE 2015 (UNAUDITED)

(In United States Dollars)

The Notes to the Interim Financial Statements form an integral part of the Condensed Financial Statements. Please visit the Company's website at www.steppecement.com to view the full interim financial statements.