Evraz Keeps Coal Targets as ‘Difficult’ Market Prompts Cost Cuts

Evraz Plc (EVR), the Russian mining and metals company part-owned by billionaire Roman Abramovich, will stick to coal-production targets this year as cost cuts shield operations from a “difficult” market.

The company’s Raspadskaya unit seeks to raise output to as much as 10 million metric tons in 2014 from 7.8 million tons in 2013, Sergey Stepanov, vice president and head of Evraz’s coal division, said in an interview. Evraz’s Siberian Mezhegeyskaya mine will start this year, adding 1.5 million tons of capacity.

The global economic slowdown has eroded demand for steel, reducing consumption of the coal used to make it and dragging down prices. While some producers of the raw material have shuttered output capacity to weather the decline, Evraz has focused on cost cuts to keep its mines open, saying that curbing volumes would be more costly than maintaining current rates.

“Demand is driven by the steel industry, which is under pressure globally,” Stepanov said in Moscow. While the “situation on the coking-coal market is difficult,” it’s “better to work than to shrink production.”

Evraz increased coal output by 22 percent last year to 18.9 million tons after starting its Erunakovskaya-VIII mine, integrating its Raspadskaya unit and raising efficiency at other sites. Its shares dropped 57 percent in the period, compared with a 67 percent slump for Russian coal miner OAO Mechel and a 14 percent slide at steelmaker OAO Severstal.

Sustainable Operations

“Evraz mines are sustainable due to about 20 percent cost reduction in 2013 and further optimization plans for 2014 and 2015,” Stepanov said. The company is adding more productive capacity to replace output from its higher-cost Abashevskaya mine, which will close this year, according to the executive.

Coking-coal prices this month reached their lowest level since the second quarter of 2009. At such prices Evraz is able to sell the coal it produces, even if for a lower return.

“We hope Mezhegeyskaya will be able to sell 30,000 tons to 50,000 tons of coal a month starting in June or July,” Stepanov said. “We have demand for the coal at Evraz’s steel mills, but it’s even more important for a project of such size to market the coal in Russia and internationally.”

The company is also working to increase output at its Raspadskaya unit, where it doubled its stake to 82 percent in 2012 by buying out management. Raspadskaya suffered explosions at its main mine in May 2010 and a further halt for several months in 2013 after high carbon-monoxide levels were detected.

Raspadskaya Plans

“We managed to restart Raspadskaya’s long-wall in December 2013 and three more long-walls will start in 2014,” Stepanov said, referring to the practice of mining a wall of coal underground in a single panel.

Raspadskaya targets output of 8 million tons to 10 million tons of raw coking coal this year, he said. The unit’s main mine plans to produce 4 million tons, and may reach peak production of 7 million tons in 2017 or 2018.

Stepanov and other senior executives have been focusing on production at Raspadskaya, and haven’t discussed any delisting of the coal unit’s shares for “several months,” he said. Raspadskaya stock has dropped about 50 percent in the past year.

Evraz is part-held by Chelsea Football Club owner Abramovich along with fellow billionaires Alexander Abramov and Alexander Frolov. The company also plans to sell its Kusheyakovskaya mine to cut costs.

To contact the reporter on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.