Good day and welcome to the first quarter 2015 financial results announcement. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Boris Krasnozhenov. Please go ahead, sir.
Yes. Good day, everyone. Ladies and gentlemen, my name is Boris Krasnozhenov, and on behalf of UC Rusal, I would like to welcome you to the first quarter 2015 results presentation and our conference call. First of all, I would like to introduce Rusal's team who is presenting today. Vladislav Soloviev, Rusal's Chief Executive Officer, CEO. Yekaterina Kulishova, Business Controlling Director. Geoff Watson , Asia Sales Director. Elena Ivanova, Head of Corporate Finance of the company. We start our presentation with the first quarter financial and operational highlights presented by Rusal's Chief Executive Officer, Vladislav Soloviev.
Good morning. Thank you, Boris. Thank you for attending our call on our first quarter results. We have shown the steady progress of our key performance metrics across first quarter. In particular, we have accelerated in both profit and cash flow generation in the first quarter of 2015. I am very pleased with our performance trajectory, which delivered yet another improvement. The key factors that drove our results were further cash cost reduction under strengthened cost management, supply discipline, and positive foreign exchange dynamics. In particular, the company has demonstrated further cash cost reduction to $1,437 per ton, which is 14% decline quarter by quarter as compared to $1,741 per ton for the same period last year, which is, as I have said, 14% decline. Rusal estimates cash cost around $1,600 per ton at the current exchange rate.
In the meantime, the realized price averaged $2,299 per ton, minus 5%, again, quarter on quarter in 2015. Realized premium is $424 in first quarter 2015 versus $429 per ton in the fourth quarter last year. Focusing on the first quarter numbers, the company achieved excellent results in my view. EBITDA rose by 11% quarter to quarter to $721 million in first quarter, as I have said. This represents an EBITDA margin expansion to 29% versus 26% in fourth quarter 2014. Rusal strategy is built on a number of major pillars. Rusal sales strategy is based on the focus on highly marginal value-added products, gaining and leading position in regional market deficit, and focusing on customer satisfaction. Rusal's alloys export shipment grew by 2.3% year- on- year. Our well-balanced product mix and regional sales split supports a high level of realized premium.
Further cost optimization and implementation of modern technologies. In the first quarter, Rusal announced clean Taishet project launch at the aluminum smelter and aluminum at 130,000 tons aluminum in 2017. Maintaining production discipline remains one of our key strategic priority. The management goes through a capacity review and may result in idling up to 200,000 tons of smelting capacity by the end of this year. In first quarter 2015, net debt was reduced by $313 million with a covenant leverage ratio at below 3.5x as of March 31st. Straight margin starts. Remember that safety and health is a key focus and key priority for our management team, and we achieved 100% standardization of jobs within the production system, including working condition and safety of the performed operations and proactively conducted widespread behavior safety audit.
UC Rusal is realizing such safety projects as the Best Safe Worker, Safe Mine in the aluminum business, Hands Protection in Nikolaev Alumina Refinery. We target full compliance with leading industry health and safety standards, and we have a dedicated committee for health, safety, and environment of board of directors level. Next slide, please. Environmental standards is another important priority for us, and we want to reduce the release of hazardous emissions. As such, in the first quarter, the ton of aluminum amounted to 88 kilo per ton. Rusal is also constantly upgrading its facilities to boost the amount of recycled and reusable water consumption to their production process. This regard, in our case, decreased to 6 million cu m. slide number seven, and here is what I would like to show you, the carbon footprint.
Both industry and government need to consider how to establish a low emission intensity threshold as a baseline of aluminum production. One ton of aluminum produced with a coal-fired technology is 5x more emission intensive than one ton of aluminum production with green technologies. The coal-fired power generation accounts for nearly 75% of the carbon emissions from aluminum production if calculated along the whole production chain, which is important. Governments should encourage greening the industry, as same global aluminum producers have a huge potential to reduce carbon emission. slide number eight. Here I would say as Rusal, we consider ourselves as a green aluminum producer. The global aluminum producer ranking based on CO2 total emissions per ton demonstrate that Rusal emissions is much smaller comparing to global peers, including largest Chinese aluminum producers.
This happens mostly because the prime source of energy for Rusal is hydro generation, making the company a green aluminum producer as I've said. Now let me pass to Geoff, our head of sales and share sales dynamics and results and strategy. Geoff, please. Geoff is not on the phone. I think we can go to the. I will comment on this because Geoff is not in the conference call. If we look at the aluminum all-in price and what happened in the market and the supply and demand. All-in aluminum price come under pressure in first half of 2015, especially now in April and May. If we look LME aluminum cash price broke fell below $1,800 per ton in first quarter, consolidating within the recent ranges of $1,800 and $1,850.
Physical premium came under pressure in first quarter 2015, since financial deals are no longer profitable and are leveraging around $200 per ton at the moment. Our realized premium, Rusal realized premium in first quarter remained high. I told that a little bit earlier, and it remained high at $424 per ton versus $429 per ton in fourth quarter 2014. Commodity market premiums lost $18 per ton in U.S. and $72 in Europe first quarter. Our total premium, Rusal premium decreased by $5 per ton due to time lag in quotation period and a well-balanced product portfolio in the regional sales split. We expect increasing liquidity in LME system should improve financial conditions and provide support to premium. That is how we see that. Now let me move to slide number 11. Now we look at our value-added products.
I would say what share of value-added products recorded in 41% in first quarter 2015. We see the slight decrease in share versus fourth quarter. We decrease the demand and conversion commodity grade metal. Targeting 55% value-added products share by 2020. This is our target. This target is still in place, and we are going to achieve it by 2020. As a whole, our value-added product sales strategy is focused on three things. First, end user segments with highest growth rate, then the products with highest margin, and finally deep products customizations to build strategic relationship with the customer. Now let me pass to Yekaterina, Head of our Business Controlling, and she will provide our update on our financial and operational results.
Good afternoon, everyone. I am happy to tell you about operational results of Rusal for the first quarter. If we would start with the bauxite part, you can see that it grew by 7% quarter-on-quarter and reached 4.124 million tons. We benefit from 80% integration into bauxite and target to reach 100% self-sufficiency already this decade. To inform you about Dian-Dian. Dian-Dian project is well on track. We started infrastructure preparation, construction works, and we expect it to be commissioned in 2016-2017, which will provide us with extra 3 million tons per annum of bauxite. Also, we are happy to inform that we have commissioned Cheremukhovskaya-Glubokaya mine in North Urals. That would give us up to 1.2 million ton of locally produced capacity, and we plan to use it for Russian aluminum refineries to cover the dependency on foreign aluminum.
Coming then to aluminum, you would see that more or less the output was on the same level. It slightly decreased by 1%, but it is just inventory rationalization. We plan to increase aluminum production to 7.4 million tons, 7.5 million tons in 2015. As mentioned, we plan to maintain 100% integration into aluminum. At the moment, we have about 60% utilization rate of our aluminum capacities, while we have up to 12 million tons available versus 7.3 million tons of production. We continue our investment project and we modernize existing aluminum refineries. Coming to the performance by segment. On aluminum division, you would see a very positive development of EBITDA margin, and it was driven by the increased sales volumes, our strong cost control management, and of course, there was a big support from the depreciation of the ruble. As ruble lost 31% quarter-on-quarter in first quarter 2015.
You see that realized premium remained high. However, we already see the unfavorable LME pricing that applied pressure on our financials in first quarter. On alumina division, the result was also strong and the company's alumina refineries in Russia and Ukraine also benefited from the local currencies devaluation in Russia and Ukraine. Also, there was positive contribution from the lower prices on fuel oil. The average alumina cash cost was $245 per ton, versus $266 per ton in the previous quarter. Coming to our CapEx project, as mentioned before, we target approximately $600 million of CapEx during this year, and we already did $87 million in first quarter 2016. Just to remind you that about 50% of our CapEx is 50% ruble denominated, that means those benefited from the depreciation here.
We plan that the maintenance CapEx including port rebuild, will be in the area of $400 million-$420 million during this year, and we will, of course, continue investment in the research and development and modernization. Once again, coming to the Amzyan project, mentioned that already we are full pace on the first stage of construction. The overall CapEx estimated is about $220 million, and we plan to spend about $40 million this year. Coming to the BEMO smelter, we expect that we will announce the opening of the first stage already this quarter, and we will start supply of metal to the domestic market. Overall, remaining CapEx for the first and second stage of the startup complex is about $100 million, including VAT left. Coming to the cost of Rusal.
Happy to inform you that we moved to the first quartile, and our cash cost reached $1,437 per ton. There was a big support of our cost optimization and decrease of raw material consumption rates, new technologies, and also production processes development. Of course, there was a very strong support from the ruble depreciation, and just to remind you that about 55%-60% of our costs are ruble denominated, that gave us a good support during first quarter. However, you can see that now the ruble is strengthening, and currently we would estimate our cash cost in the area of $1,600 per metric ton. There is also a pressure from ruble inflation and we see that in the area of 15%-20% further on. Once again, to strengthen that, we are the most efficient large-scale primary aluminum producer positioned in the first quartile. Coming to the profitability growth.
You see our strong EBITDA performance. As mentioned before, we reached $721 million, which is 11% growth quarter-on-quarter. It is driven by the high aluminum realized price, favorable currency movements in production regions, and there was also impact of increased sales volumes. Our EBITDA margin in first quarter is 29%, while aluminum segment showed 35.8% in first quarter versus 30.1% in the last quarter of the previous year. Coming to the free cash flow slide, you can see that we had positive free cash flow of $380 million. We maintain CapEx discipline and spent again about $87 million. If you compare between the quarters, you would see that the smaller free cash flow in first quarter 2015 was driven by a smaller working capital relief.
On that, I would like to pass you to Elena Ivanova, Head of Corporate Finance, and she will provide you an update on Rusal's debt dynamics and structure.
Good afternoon. Good morning, ladies and gentlemen. Let's take a look at debt structure analysis. As been mentioned already by Vladislav, our net debt is below $8.7 billion. in first quarter this year, Rusal made further debt repayments, total amount is $133 million, and additional $192 million in April of [inaudible]. As you probably know that the value of the stake of En+ Group is approximately $7.8 billion, which is equal to almost 90% of our total net assets. In addition, as of end of March, the covenant leverage ratio is now below 3.5 level. That means that our interest rate on the PXF credit facility will come down, since the interest rate is linked to the leverage of the company. Starting from June 2015, interest rate on the fifth tranche is going to be at the level of LIBOR plus 3.6% cash without any peak.
That means total reduction of interest rate by 1.15%. In April this year, the company successfully Bratsk Aluminium Smelter, which is the issuer of RUB bonds, successfully fulfilled its obligation under the put offer date through acquisition of bond separation to the market through bondholders. That's a quick summary on that. With this, I will pass to Boris Krasnozhenov to talk about-
Yes. Going through our market overview section, we would like to confirm that aluminum demand fundamentals remain healthy.
Can you hear me? I had a problem with the connection for slide 10 and slide 11. I have now fixed that.
Sorry.
Yes.
Geoff, you can start your part in this case. You can go from slide 22, Aluminum Demand Fundamentals.
Thanks very much, Boris. To slide 22, where we are talking about demand fundamentals, which remain quite healthy. In 2015, global demand is forecast to grow at about 6.5% year-on-year to close to 60 million tons. After China, North America consumption is the standout, as you can see in the top right-hand graph. It is forecast to grow at 5.4% due to strong auto demand and gradual recovery in the construction sector. European consumption is expected to increase by 3% during 2015, driven by robust demand in Turkey and recovering demand in Germany and the U.K. Strong growth in transportation continues with between 5%- 6% cumulative annual growth rate through 2015 to 2020.
Note the graph at the bottom right-hand side, where Rusal estimates global aluminum consumption is expected to reach nearly 70 million tons in full-year 2018, and that represents a growth rate of 6% between 2014 and 2018 versus 55 million tons in full-year 2014. Turning to the market sectors that deliver the growth to slide 23, where we talk about primary aluminum end-use structure. The pie chart on the left-hand side shows transportation to contribute over 25% of demand, closely followed by construction and electrical. The pie chart on the right-hand side shows transportation driving growth over the next five years, contributing 41% of the 5.2 million tons of incremental growth. Electrical is the second major driver as cable demand continues to expand with electrification in developing countries and replacement of copper by aluminum. Moving to slide 24, we examine regional growth.
We are seeing strong growth in key markets outside of China. The North American order book remains robust, with March orders excluding can stock up 8.2% year-on-year, and year to date 6.9%. Much of the strength continues to come from heat treatable sheet, which is up 152% year-on-year and reflects commissioning of heat treatment lines for aluminum automotive sheet in North America. In total, 1.6 million passenger cars were registered across the EU in March. That follows some good growth in North America, the 19th consecutive month of growth. In the first quarter of 2015, new passenger car registrations increased by 8.6%, totaling 3.5 million units. Japanese new orders from abroad increased with a favorable JPY-U.S. dollar rate, helping to improve export competitiveness. Transportation is and will be transformational for aluminum as we turn to slide 25, where we show the details.
Aluminum content in U.S. light cars is forecast to grow from 152 kg per unit in 2014 to 250 kg in 2025, with the component growth shown in the top graph. This translates to over 1.6 billion tons of growth in demand for aluminum sheet by 2020 due to auto demand growth and content growth per unit in North America alone, and cast and extruded products growth will add to this overall growth. Global aluminum consumption in transport is forecast to grow at between 5% and 7% cumulative annual growth rate through 2015 to 2020. More than 2.6 million tons of copper consumption was lost by aluminum substitution, as the auto industry aims to use more aluminum in cars than copper to drive weight reduction.
The switch to automotive sheet is transforming the rolled products industries in both Europe and North America as traditional can sheet producers seek higher margin products. We now turn to pricing in slide 26. The LME price is forecasted to rebound based on the lower premiums. The LME price is technically well supported at the one-year low of $1,750 per metric ton in Q1, with the lowest period of volatility in five years. With the current LME price, about 6 million tons of production capacity ex-China, that is 21% of total production, unprofitable. But with the all-in price taken into account of $2,100, 2 million tons is unprofitable. In fact, it is necessary for the all-in price to stay over $2,000 a ton to keep production ex-China at a level that allows capacity to meet demand growth.
We anticipate premiums to stabilize around $200 per ton, although we note that the level is going to be highly dependent on the contango in the market. What does this mean for capacity cuts and the deficit, which we show in slide 27? The deficit outside of China is expected to widen as there are more capacity cuts. More than 6 million tons of aluminum smelting capacity outside of China has been cut since 2007. As we illustrate in the top left-hand side graph, Rusal estimates that 3.6 million tons of closed capacity will never be restarted, essentially due to demolished infrastructure, labor availability, competitive power sources, and companies that have gone bankrupt. Regional premiums have dropped by 40% on average year-to-date. The presentation actually says 20%, but that is an error.
It's actually 40% year-to-date, making less likely any restarts this year as UC Rusal initially estimated 320,000 tons of capacity in 2015 and nearly 840,000 tons in 2016. Rusal has now revised up the possible capacity closures excluding China to between 1 million tons- 1.5 million tons from 0.7 million tons- 1 million tons in 2015. This also revises our 2015 market deficit out of China from 1.1 million tons- 1.5 million tons. We do not expect any new capacity supply from the Middle East until 2018, as all of the capacity has now been commissioned and is in the market. Nearly all probable and possible aluminum capacity restarts, excluding China, are incorporated in our in-house supply and demand forecast, which still envisages a deficit of around 1 million tons through to 2018.
As we move to slide 28, we see the LME inventory reduced to the lowest level in six years. LME stocks have dropped by 1 million tons or just over 1.5 million tons from a peak of nearly 3.9 million tons at the beginning of May 2015, and they're at the lowest level recorded since May 2009. Current tendencies suggest a significant decrease in deliveries to LME warehouses as a consequence of high demand from consumer segments and the growing market deficit. The new LME load in and load out rules are expected to have negligible impact on metal flow from affected warehouses under the current market structure, as load in rates have been moderate.
As a result, total LME stock consumption ratios, which you can see at the graph on the bottom left-hand side, excluding China, may fall below 58 days in 2014 and 41 days in 2015 and return to the pre-2009 level of 35 days by mid-2016. So that concludes the market outlook, and I'd now like to pass back to Boris Krasnozhenov, head of investor relations, to provide the China update.
Yes. Thank you, Geoff. We're going to brief update on the situation on the Chinese aluminum market. First of all, slide 29, a couple of points on Chinese capacity growth that moved domestic market into surplus. According to market estimates and forecasts, China may add approximately 4.5 million tons of new capacity this year. However, we are highlighting a number of factors that may actually change the situation. First of all, it's slowdown of Chinese economy may further lead to weakening of demand for metals, and low Shanghai price may push companies to suspend capacity expansion projects and curtail loss-making capacity. Secondly, we see tightened regulations on loans to aluminum industry in China, land allocation that already led to decrease of fixed investments in aluminum smelting construction by approximately 30% last year on a year-on-year basis. And in our view, it will continue in 2015.
Also, we should mention two more points that the Chinese government has a strong intention to introduce the Environmental Protection Tax, which has been submitted to the State Council. This move will potentially lead to increased production costs of high-polluting industries. That includes definitely power generation, aluminum, and steel-making industry. Also in 2014, Chinese producers lobbied 15% tax elimination on primary aluminum, but with no success. In our view, this is against current Chinese policy for development of domestic downstream industry and favorable pricing for primary metal. Going to slide number 30, you see that Chinese producers suffered increased losses amid falling Shanghai price. According to consultants' estimates, around 12.4 million tons or about 42% of total Chinese aluminum production capacities have been loss-making at an average Shanghai cash price in April this year.
Also, we should say that the Shanghai aluminum price rallied at the end of April following the announcement that China will remove export taxes for aluminum rods, bars, and some other forms of aluminum semis from May 1st, which currently attract provisional tariffs ranging from 5%-15%. But this removal is unlikely to make this export profitable and at much larger volumes due to no VAT refund. Meanwhile, HSBC China's flash manufacturing PMI index for April was the weakest in a year and still increasing supply and capped the growth of aluminum prices in China. On slide 31, we present our view on China's semis export. We've seen semis export growth in the end of last year and beginning of this year. However, it moved to normal levels due to lower LME Shanghai arbitrage.
China exports of aluminum semis fell 5.1% year-on-year and 31% month-on-month to below 300,000 tons in March due to deteriorated arbitrage. We've seen some growth of Chinese semis exports, most probably in April, due to improved reverse arbitrage for aluminum. However, we presume that the recent sharp increase is due to certain players exported semis for remelt, which are not subject to 15% export tax and attract VAT rebate. China semis remelt export transactions might have taken place in December also when we've seen quite abnormal export volumes. Particularly, we learned that these volumes have been going to Vietnam and Malaysia. However, our in-house view that Chinese semis exports continue to decelerate as China improves its customs administration to eliminate such practices, and we believe that semis exports will be at normalized levels. Thank you for listening our presentation. That concludes our presentation.
In the appendices section, you may find a summary of our financial results as well as the segmental breakdown. We will now open the lines for questions.
Thank you.
Yes. Please, the coordinator of the conference call, please open lines for questions.
Thank you. If you would like to ask a question at this time, please press star one on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. We will now take our first question from Neri Tollardo from Morgan Stanley. Please go ahead, your line is open.
Yes. Thank you very much for the presentation. I have quite a few questions. First, could you please explain the abnormally high difference between the consolidated EBITDA and the sum of the segment EBITDA? It was about $150 million in the first quarter of 2015, compared to $35 million last year and $206 million for the full year in 2014. Second question is on the settlement of financial derivatives. It has been quite a drag on cash flow for the last year and this quarter as well. Could you please explain what the derivatives are related to? What factors caused this settlement, and what is your expectation for the year? Another question is on the cost of other raw materials. The U.S. dollar value of cost of other raw materials per ton of aluminum sold only declined 4% quarter-over-quarter. That is despite the ruble depreciating and the oil price collapsing.
Could you please explain the drivers of that? Last question on the capacity that you are reviewing, the 200,000 tons, could you maybe specify which capacity you are talking about? Thank you.
Okay, thank you very much for your question. This is Ksenia Mironova, the Head of Financial Reporting. I would probably try to address first two of your questions on unallocated expenses and on changes in fair value of derivatives. Further, I would probably ask Katya and Vladislav to elaborate on the cost of other raw materials and our plans on further idling of capacities. On unallocated expenses, yes, you are quite right. The amount in this particular quarter is quite significant. Basically, it relates to certain one-off effect of the elimination of intra-segment turnover that was really affected with the significant fluctuations in exchange rates. We believe that in further quarters, this level would be normalized back to between $30 million- $50 million per quarter.
Again, except of this particular item, all other unallocated expenses are pretty much the same, and it relates to the management costs and certain social and charity expenses, as well as other non-operating expenses that cannot be directly allocated to this or that business segment. On change in fair value of derivatives, we have certain number of different cross-currency and interest rate swaps and also options. All the details are presented in our annual report and in our annual accounts. The fact that driven the significant change in fair value of derivatives is first, that certain instruments expired in the first quarter of last year, and also, the other fact is that the fluctuations in forward curves was much more significant at the end of the first quarter of 2014 as compared to the end of this quarter.
That also affected the fair value of derivative assets and liabilities, as they are stated on our balance sheet. This particular quarter, we have a significant decrease in change in fair value. Basically, what the outlook is, it depends on the fluctuations on the exchange rate, and we can observe it in the nearest term. Again, the major factor is that not only the spot exchange rate, but also, and the most important is the forward curve. On that, I would probably pass to Yekaterina to explain the dynamic in our other raw materials.
Yes. Speaking about the cost of raw materials for Rusal, I would say there is very limited influence of RUB depreciation on that item of our costs. This is mainly due to the fact that most of the raw materials we buy are either in U.S. dollar or somehow linked to the U.S. dollar. We have a big portion of raw materials linked to LME price or to oil prices, which are dollar-denominated. There was also a change in the structure of raw material purchases. We had limited supply from Ukraine, which we had to replace from offshore parts. For some of the raw materials, the prices reached its bottom in fourth quarter of 2014, and now they continue either to be stable or there is even slight growth in some of the items. Then probably coming to the idle, potentially shutting down extra 200,000 tons of capacities.
As a general comment, we do not plan to increase volumes in 2015 compared to the last year for sure. But we are considering the optimization of our effectiveness on smelters which have high electricity tariffs. At this time, we do not have long-term visibility, particularly considering that the supply on aluminum is still fragile. It is quite premature to give you any particular promises. We will be monitoring the electricity tariffs in some of the regions and then make a final decision.
Okay. Thank you. Could I just follow up on the first question on the segmental EBITDA and the consolidated EBITDA? If this was sort of a one-off effect, would you say that the first quarter consolidated EBITDA is too low, or that the segmental EBITDAs that you reported are too high? As in, which way are we going to see the cancellation of that one-off?
Well, both the consolidated and the segment results are fair, and it is supported by the auditor's review report. But again, this is the effect of the consolidation between the segments. As long as the forward exchange rates will not be volatile and yet significant again in this quarter, the unallocated expenses will come back to their normal levels between $30 million-$ 50 million per quarter. If you look at the segment, probably, both of them are true and fair. This is just the consolidation effect.
Okay. Thank you.
Thank you. We will now take our next question from Sergey Donskoy, from Societe Generale. Please go ahead. Your line is open.
Yes. Thank you. Two questions. One, actually on the cost structure, sort of a follow-up. in Q1, your energy costs remained basically flat quarter-over-quarter. You mentioned in the press release certain cost pressures and tariff growth. To the best of my knowledge, the growth in market prices in the Siberian energy zone in the first quarter was relatively mild. It was about, I think, 5% quarter-over-quarter. So given the sharp ruble devaluation, I was a bit surprised to see no decline in energy costs whatsoever. Could you please explain what was the driver? Why the tariffs increased so much, and exactly by how much? Was it due to the growth in the market tariffs, or was it the growth in your long-term contracts with hydropower stations? My second question is, could you provide some guidance on the cash costs at Dian-Dian?
Okay. Starting from the electricity prices dynamics. I think there was overall growth of electricity prices quarter-on-quarter, and we believe that that was higher than 5%. It was over 20%. There was also increase of power grid payments and there was also seasonal factor. We see that the prices started declining. However, they didn't yet come to the normal levels we would expect them to be in that season due to the fact that there was a difficult period of low water level during winter season. I think the key factor influencing the electricity tariff was the increase of the price of electricity. There was no influence of any contracts because the situation was the same last quarter of 2014 and first quarter of 2015 from the structure of the contracts we have.
For Dian-Dian, it finally will depend on the amount of investment, what we spend. If we are talking about cash cost, FOB, I think it should not exceed $15, maximum $20 per ton.
Okay, thank you. Just one small follow-up on the energy cost. If the tariff growth was about 20% and RUB dropped by about 30%, there still should be some decline in costs. Was the lack of any such decline a reflection of increased power consumption or something else?
No, I think the overall power consumption was improving in the first quarter, that is for sure. We can go further after the call factor by factor. There are seasonality ratios applied, so it was purely the price growth versus the fixed depreciation.
Okay, thank you.
Thank you. We will now take our next question from Oleg Petropavlovsky from BCS. Please go ahead. Your line is open.
Good day. Thank you for the presentations. A couple of questions from me. First of all, by how much do you think your interest expenses will go down after interest rates will go down following a lower net debt to EBITDA ratio? My second question is about aluminum premiums. What do you expect to report in the second quarter?
Yes, on your first question, it's Elena Ivanova. The interest expense will drop indeed. Well, basically, we've already seen the decrease of interest rate under PXF by about 2%, taking into account previous decrease of interest rate when we demonstrated year-end results. Roughly speaking, if you compare in terms of guidance for the year-end 2015, it will be a decrease of about $100 million-$120 million on annual basis overall.
Geoff, can you please comment on premiums for the second quarter you see on aluminum?
Yeah, certainly. As I said in my presentation, premiums year to date, these are regional premiums, are down by about 40% across Asia, Europe, and North America. Our view is that the drop has come close to a bottom and the average now is around about $200 a ton. The issue that we're still is a little bit unknown is what will happen with Asian premiums. As you know, Asian premiums are negotiated quarterly, and the quarterly premium for the MJP is $380. We expect that to drop in Q3, and the spot premium in Japan at the moment is somewhere between about $240- $260.
We don't expect the quarterly premium, which is based on long-term contracts, to drop that far, but we do expect some drop. However, the general view is that the drop in Europe and the United States is coming close to a bottom, and in any case, it's the all-in price that's the important thing, and that looks like it's stabilized when you take the LME and the premium together. The other factor in premiums is with our exposure to value-added products at about 41% right now, growing to over 46% by the end of the year, is that product premiums have been largely unaffected by the drop in regional premiums. So the strategy of developing a very strong value-added product mix gives us some protection from the drop in the regional premiums.
Thank you.
Thank you. We will now take our next question from Barry Ehrlich from Citibank. Please go ahead. Your line is open.
It's just one follow-up to the previous question and a few other questions. To just make sure we understand, you expect Rusal's second quarter realized premium to be somewhat above the expectation you have for the quarter of around $200. So it will be above that level, you think. Second question, when do you expect BEMO stage 1 to be at full capacity? Are there any issues or impediments to getting there, or any issues with water levels or electricity supply at BEMO? Thank you.
Okay. It's Geoff Watson again. Let me cover the premium question first in Q2. As I said, the structure of premiums is bifold. It's a regional premium plus our product premiums for value-added products. We expect that the average regional premiums for Q2 are going to be probably above $200. Remembering that while the European premium has dropped dramatically and the Midwest perhaps a little less so, there's a lag with the premiums in Asia generally, which are based on the MJP premium, which is negotiated quarterly. We don't expect to see a drop in the Asian premiums until quarter three, and they'll start to be negotiated in the next few weeks. So that will give some strength to our average regional premiums going into quarter two.
The other aspect, as I said, is with our value-added product mix, that the product premiums which come on top of the regional premiums, the strength in those premiums has remained. We've seen very little of any drop in product premiums, and you add those to the regional premium to come up with a total premium for Rusal by the percentage of value-added products in the mix.
Now coming to your second question on BEMO project. As you may imagine that as soon as it starts, it will not be full capacity production. We expect limited volumes to be produced that year, and all those volumes would be supplied to Russian market and sold locally. As for the hydro station, there was an opposite situation to Rusal because they were selling the electricity already during the first quarter, so they benefited from the higher prices and low water. In general, the overall financial results of them are better than we expected due to that fact, and we do not see any issues because of the water or anything else further on the hydro station this year.
Sorry, please go ahead with more questions.
Thank you. We will now take our next question from George [inaudible] from Deutsche Bank. Please go ahead. Your line is open.
Good afternoon. Thank you for the conference call. I have a few questions. First, could you please provide an update on the stages of the power contract with Krasnoyarsk Hydroelectric Power Station and KrAZ? The second is on Dian-Dian. I think the license agreement on the development of that project also stipulates the construction of an aluminum refinery, and it was quite a big aluminum refinery, if I remember correctly, about 5 million tons. Can you please provide an update on the stages of that project? On BEMO, can you please confirm when the launch date is, and also how much that sits on the JV? Thank you.
Okay. Starting with the Krasnoyarsk Hydroelectric Power Station situation. We would not like to comment a lot on that, just the overall contract is in court at the moment, and we do not expect the supplies under that contract in the short-term perspective to run. Coming to your Dian-Dian question. So far, we are only looking at the bauxite business there, and we don't have any extended plans on refineries yet. On the debt. Mm-hmm.
It's Elena Ivanova here. On the debt level, in terms of joint venture, in part of Boguchany hydropower plant, the debt is nominated in rubles, and that's approximately RUB 20 billion , which is fully disbursed. As Yekaterina mentioned, there's existing cash flow, and it's available for further debt repayments. In part of BoAZ smelter, the total disbursed debt is roughly about $1.1 billion at this point of time.
For the start of BoAZ, we expect that to happen in June.
Can I clarify something on Dian-Dian project? I thought the license agreement on the development of the entire project stipulated the construction of the refinery. Are these two different projects or two separate projects, or it's one project which is or may be subject to review? Can you please confirm that?
The license stipulated we have a such bit of obligation to start to do this project in 2018. There are other number of stages in our license. Now the first stage to build the Dian-Dian mine. That's why we even not to start choosing any company who could do the project or feasibility study for this refinery. This is the third stage of our license, and it will start no earlier than 2018. That's why it's early to speak about it now.
Thank you.
Thank you. As a reminder, to ask a question at this time, please press star one. We will now take our next question from Boris Sinitsyn from VTB Capital. Please go ahead. Your line is open.
Hello. Thank you for the presentation. Actually, three questions from our side. The first one.
What is the reason behind the decrease in other revenues, and should we expect the current level of other revenues going forward? The second question concerns your plans over debt repayment this year. What total amount of debt repayment do you plan this year, including special repayment and cash sweep? In particular, will we continue to early repay debt in case your covenant net debt EBITDA ratio falls below 3.0x? The third question is on your CapEx. That figure, $600 million, on what exchange rate is it based? Thank you.
Okay, thank you very much. This is Ksenia Mironova. I would probably address your first question on the decrease in other sales. First of all, primary part of the sales relates to other raw materials, other income that is owned by the company. Major part of it, or at least big part of it, is placed in Russia, so it is affected by the exchange rate in significant portion. But also due to the fact that company spent certain efforts on optimization of our working capital. So we have already disposal other materials and other items that could get rid of. So probably the further level much more depends on the exchange rate that we will observe in the future periods.
Yeah. In respect of debt repayments, yes, indeed. According to the cash sweep mechanism, if we take into account the entire 2015, we forecast that it will be in the region of $400 million-$500 million paid through cash sweep. Once it falls away, when the leverage reaches the level of 3x EBITDA, the company is going to decide whether to proceed with additional further earlier debt repayments before year ends, and that will very much depend on market environment. As you probably know, it's just worthwhile mentioning that our scheduled repayment will already commence starting from January next year.
Now coming to your question about CapEx. Just once again, about 50% of our CapEx expenses are RUB denominated, and also they are not based on just the amount, they're based on the project. Their initial planning was done at the rate of RUB 60 per U.S. dollar, but the exchange rate will not influence significantly our CapEx plan because we will just be looking at the cost of each project.
Okay, thank you.
As there are no further questions in the queue, that will conclude today's question and answer session. I would now like to turn the call back to the host for any additional or closing remarks.
Ladies and gentlemen, thank you very much for joining the call. Thank you very much for your questions and interest in the company. If you have any further questions or need more details on already answered questions, please revert to investor relations department. Thank you very much one more time, and have a good day.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.