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Fitch affirms Magnitogorsk Iron & Steel Works at 'BB+'; Outlook Negative

Fitch Ratings has affirmed Russia-based OJSC Magnitogorsk Iron & Steel Works' (MMK) Long-term Issuer Default Rating (IDR) at 'BB+'. The Outlook is Negative, the rating agency informed.

The ratings reflect MMK's position as a leading supplier of steel to the Russian market and as a producer of high value-added steel products. The Negative Outlook reflects the company's inability to meet Fitch's leverage guidelines, despite efforts to reduce debt in 2012.

MMK repaid USD535m in 2012 and USD700m in 2013 to keep its elevated leverage under control. Positive FCF also contributed to a decline in funds from operations (FFO) adjusted gross leverage to 3.2x at end-2013 from 3.5x at end-2011. Fitch expects MMK to continue generating positive FCF in 2014-2016, due to a moderate capital spending programme. This will contribute to a further decrease of FFO adjusted gross leverage to 2.7x by end-2014 and to 2.1x by end-2015.

MMK has a 25%-100% market share in the Russia market for various rolled steel products. Up to 82% of the company's revenue and 84% of total sales volumes are generated in Russia and CIS, resulting in concentration risk.

Although demand for steel products in Russia has been healthy, driven by steel consumption in construction, pipe production and automotive industries, it may weaken following deterioration in the Russian economy over the last two quarters. Nevertheless, the lack of diversification is partly offset by the price premium on domestic steel products (USD180/tonne on average in 2013).

MMK's lower vertical integration versus its peers has benefited the company in the current weak market environment. Falling prices of major raw material, coking coal and iron ore mean raw materials from suppliers become cheaper than the operating costs of in-house suppliers (typically medium to high cash cost producers). MMK's slab cash costs have been declining over the last two years, to USD356/tonne in 4Q13 from USD459/tonne in 4Q11, placing the company in the second quartile of the global slab cost curve.

Following heavy investments over the past six years, the company's capital expenditure declined to USD681m in 2012 (from an average of USD1.7bn per year in 2007-2011). This resulted in positive free cash flow (FCF) generation of USD224m in 2013 for the first time since 2007. Fitch expects MMK to remain FCF positive (2014 forecast: USD435m) over the medium term.

MMK's Turkish division narrowed its operating losses to USD86m in 2013, from USD190m in 2012, following suspended steel-making production. It reported EBITDA of USD25m in 2013 versus negative EBITDA of USD75m in 2012.

Fitch assesses MMK's corporate governance as being in line with other Russian corporates; the country's overall poor standards of governance and lack of legal safeguards are constraints on the ratings. As a result Fitch has notched down MMK's ratings by two notches, which is common for companies in Russia with similar standalone profiles.

The company's liquidity position is acceptable with USD154m of cash on hand and USD1.7bn of committed unutilised bank loans at end-2013 compared with USD1bn of short-term borrowings. Fitch also considers MMK's 5% stake in Fortescue Metals Group Limited (BB+/Negative) as an additional source of liquidity, if needed. Currently, MMK's stake is valued at around USD840m.

OJSC Magnitogorsk Iron & Steel Works (MMK, tax number: 7414003633) is among the largest world steel manufacturers leading in Russia's iron and steel industry. The company's assets in Russia are a large iron and steel complex that encompasses the entire production chain from preparation of iron ore to advanced processing of rolled steel. MMK produces a great variety of metal products where high-level-processed goods of greatest added value prevail. In 2010, MMK produced 11.4 million tonnes of steel and 10.4 million tonnes of finished metal products.

IFRS net loss of OJSC Magnitogorsk Iron & Steel Works for 2013 grew 27.9 times to $2.429 billion from $87 million for 2012. Revenue decreased by 12.2% to $8.19 billion from $9.328 billion, profit from operations by 56.9% to $174 million from $273 million, EBITDA by 10.27% to $1.223 billion from $1.363 billion, EBITDA margin grew to 14.9% from 14.6% the year before.

According to the DataCapital information retrieval system, RAS net loss of MMK for Q1 2014 was RUB 633 million against a profit of RUB 994 million the year before. Revenue increased by 1.74% to RUB 58.28 billion from RUB 57.283 billion, sales profit by 24.85% to RUB 4.19 billion from RUB 3.356 billion, loss before tax was 1.101 RUB billion against a profit of RUB 1.162 billion

"AK&M", 15.05.2014


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