Good morning, ladies and gentlemen. I would like to welcome you to our third quarter results presentation and conference call. First of all, I would like to say a few words about the remarkable event, very important for our company, Siberia, and probably for Russia in whole, the successful launch of BEMO Hydro Power Plant. The plant has generated first electricity in the middle of October and has started rapidly ramping up facilities. Full capacity will be reached already by the third quarter of the next year, making Boguchany Hydro Power Plant one of the top five Russian hydropower producers.
I am moving to slide number five, and would like to go quickly through third quarter highlights. I think the keynote to this quarter's result is the low aluminum price, which obviously hit the top line significantly. At the same time, support from product mix improvement and higher premiums helped a lot, but were not able to offset this negative effect. Aluminum physical sales decreased by 3% as compared to the previous quarter. On the bright side, we achieved a record high realized premium of nearly $230 per ton, an outstanding 18% growth to the second quarter. VAP, I mean value added products output, has grown again up to a record high level. It now stands at slightly above 40% of total production volumes.
The quarter's profitability was supported by cost savings coupled with a depreciating domestic currency. We had our cost of sales decrease by 2%. Aluminum segment cost per ton which equaled $936, as well as average power tariff, decreased to the lowest level since the beginning of 2011, which is good news. Also, Aluminum segment EBITDA margin of 8% was pretty much in line with those of the industry's top players. As per the balance sheet, we have reached an agreement on debt covenants with lenders, which will help us to maintain flexibility, and Evgeny Kornilov will spend some more time talking about our debt situation.
In particular, negotiated an option to extend financial covenants grace period successfully completed, and the grace period is extended to the end of 2015. Also, an early repayment of around $400 million will be made with international and Russian lenders in the fourth quarter of this year. Important to mention the free cash flow of nearly $900 million for nine months and 20% improvement in working capital since the beginning of the year mainly due to stocks optimization. Global market was on our estimate in a deficit of nearly 200,000 tons in the first nine months. We still see that around 30% of global production is loss-making at the current market price, and we predict further cuts of production.
In China, new capacity and support from local governments, including subsidies for electricity tariff, outpace further cutbacks and stocks rise on the Shanghai Futures Exchange. Good news is China State Reserve Bureau announced to build new stockpiles. We expect at least 400,000 tons of primary aluminum will be bought from the market by the year-end to continue the strategy which was implemented in December 2008. Finally, I would like to share some positive news coming from Guinea. That is the successful launch of the Kindia-2 bauxite project. The project will extend Kindia's total capacity by 20% to nearly 4 million tons by the end of this year. Now I am passing the word to Evgeny Kornilov.
Okay. Thank you, Oleg. I am now on slide six, which talks about our top-line performance. As you can see in the slide, we have observed quite weak LME in this quarter, which on the face of LME shows a drop of 3% versus the previous quarter. On top of that, because company has a certain delay in quotation period, which is used to determine the sales price per each individual contract, we have unfortunately negative impact of this quotation period in the third quarter, which resulted in a situation where average realized LME price now contract has decreased 10% quarter-on-quarter. Well, it is not gone completely.
Of course, this is primarily about some recovery in the market, which we observed in September, and this September high LME will be reported as part of our Q4 earnings. This is kind of a temporary impact on our statements, but as we look on Q3 standalone, we see LME going down 10%. The good news on revenue is actually that we have continued strong performance of premiums, which when factored in, has resulted in a situation where the price drop was not -10%, but -6%. We have further increase in premiums, and we will talk about this later in our presentation.
In terms of production volumes, we are pretty much flat. We have some temporary fluctuation between the quarters, but it just relates to normal flow of product between quarters. There is nothing to be worried about. The production has a slight decrease as we are optimizing some of our capacity and sales develop just in line. When we look on our P&L, the revenue line has resulted in a 9% decrease quarter-on-quarter, primarily because of combination of LME and some shift of volume between the quarters. At this moment, I would like to ask Steve Hodgson, Head of Sales and Marketing for RUSAL, to talk about situation with our sales.
Thank you, Evgeny, and good morning and good afternoon everyone on the call. As Evgeny mentioned, the quarter wasn't a great quarter for price. Interesting though, the price in the quarter was largely impacted by macroeconomic sentiment in Europe and a lower sentiment in China rather than the outright supply-demand fundamentals in the industry, and I will talk about that a bit more later in the presentation. As I have mentioned in previous calls, the premium picture probably gives a better representation of the market in physical terms during the quarter, rising to $226 per ton or representing about 12% of the LME price.
In this case, the premium both reflects the tighter underlying market conditions, but for RUSAL, most importantly, it represents our continued drive towards sale of higher value products. You will know that this is a consistent theme in our presentations. In Q3, the value-added sales portfolio achieved 40% of our total output. The main areas of growth in this regard have been in the area of foundry alloys. These are supplied primarily to the automotive sector. Interesting to point out as well in the third quarter that our capacities for the production of extrusion billet and wire rod for the electrical segment were 100% utilized during the period .
Regionally, the sales picture remains largely unchanged from that that we discussed three months ago. With demand in Europe and Russia stable quarter-on-quarter, small growth in North America, particularly in value-added sales and some growth in Asia as well, again in the value-added space. With that, I will hand back to Evgeny.
Mm-hmm. Thank you, Steve. I now move to slide number eight, which talks about the effort which company takes on the cost side, and you can see, in my view, very impressive chart on the top left corner of this chart, which shows that the company has achieved aluminum segment cost of $1,936. So $1,936 per ton, which is, as you can see, a further decrease from the previous quarter. It actually takes us below the figure which we have observed in the first quarter 2011, where the whole story with liberalization of electricity in Russia has started, and where we have seen initially high cost, which the chart demonstrates in a very good way. It is just a summary of all the efforts which company is taking is shown in this figure.
Of course, we had certain help with foreign exchange, which has weakened in the second and third quarter, which gave us certain protection for our result, but behind that there is a lot of activities which company has taken to preserve the cost level and to preserve the cash. You can see on the right-hand side situation with the power tariff, which was at $0.311/ kW h which once again is the lowest figure in this period. Despite situation which we observed in third quarter, where the wholesale price for electricity has started to grow in the third quarter. As you know, there was certain restrictions on the price growth from the beginning of the year, but in the third quarter, we have seen some first indexations on utility tariffs, like gas, like rail, and of course, such situations, they create certain pressure on electricity.
We also have been not very lucky with situation of hydro generation in Siberia because we have observed lower water level in reservoirs in Siberian rivers, which resulted in lower output through hydro stations. As a result, we have seen somewhat lower contribution of hydro-generated electricity than we wanted. Anyway, combination of all other factors has helped us to still achieve very effective price for this period. The comments which I just made about electricity suggest that we have a room to improve in terms of hydro generation in Siberia, which will be our next quarter's pickup. That will normally happen in spring next year.
If you move to slide number nine, this is a bridge which shows evolution of EBITDA between the quarters. You can clearly see here separate factors which impacted our performance. I think it is quite clear that LME, together with quotation period, has taken us down by $204 million. QP, quotation period, is a temporary thing, which once again, I said it earlier, I repeat once again, it is very occasional that we have seen such a significant impact of quotation period in one quarter. The good thing, of course, is that across several quarters, it averages out, and it goes out. It means part of this quotation period was picked up by us in the second quarter. Part of that will be picked up in the first quarter. The third quarter is penalized on this specific item.
You can see the positive impact of exchange rate. I think more importantly, you can see the positive contribution of increased premium, which contributed $53 million on one standalone quarter, which is a very commendable amount. You can see the decrease on power contracts, which we have achieved in the second quarter, stripped off of macroeconomic impacts, which we have in this contract. This another quarter. When we talk about aluminum raw materials, you have actually net out these two factors together because the company has decreased own production of aluminum this quarter, and we were buying more in the market. In fact, as you can see, they basically erase each other. We bought more aluminum but less raw materials to produce raw aluminum. You shouldn't be confused by these two things.
As I move to slide number 10, talking about our debt, we see that we have achieved record low net debt level at the end of third quarter of $10.7 billion. Once again, it is an area of specific focus of the management to manage the liquidity position in a very prudent way. The company has been very active in managing the working capital down. We have been very accurate on CapEx saving, and we keep our CapEx at the level which is required to operate the plants. We are doing just very little additional CapEx, very little development CapEx at this moment of time as macroeconomics continues to be weak. Significant input from working capital.
We also have received dividends from our investment in Norilsk Nickel in the third quarter, which allows us to demonstrate very high cash balance and, in fact, a further decrease in the net debt in the third quarter. Looking forward, we understand that situation with macroeconomic weakness may continue for some period of time. To be on the safe side and to preserve the stability of the operations of the company, we have taken an action, and we have concluded negotiations with our lenders to extend the covenant holidays for another year, which has been successfully signed, and now the company has this flexibility until the end of 2013, which, of course, is a big help in terms of managing the situation with the liquidity of the company.
At the same moment of time, we talked earlier with you in the previous meetings that we have 1.3 million of debt obligations, which are due in 2013, which are due to be refinanced. At this moment of time, we have taken a decision to prepay $400 million in the fourth quarter out of next year obligations, which will be done. We will use partly cash, which we have on the balance sheet, and we have some unutilized lines which will be used to do that. So which will take our obligations down to 900 million, and all of this 900 million falls into the third and the fourth quarter of the next year. So once the prepayment is done, the company will have no outstanding debt obligations until the end of July of the next year, with really small exceptions, which we can disregard.
So for 900 million, for the second half of the year, the company takes it very seriously. We are in constant consultations with our lenders, and of course, it's our intention to manage the refinancing obligations ahead of time. So we are taking it seriously, and we will update you about the progress when it becomes due. So at this moment of time, I would like to ask Oleg to continue the presentation.
Thank you. Thank you very much, Evgeny. We are on page number 11 at the moment. Indeed, recently, some important changes have been made to the composition of our Board. The main one is the appointment of Mr. Matthias Warnig as the new chairman. Mr. Warnig is also the Managing Director of Nord Stream. He's Chairman of the Board of Transneft, as well as Independent Director of Rosneft, not to mention his other senior positions. We are very welcome, Mr. Matthias Warnig, as a new chairman. Let me also remind you about our commitment to increasing the number of independent directors on the board, and the appointment of Mr. Warnig is one step further to achieve this goal.
A few words about our projects. Page number 13. I have already mentioned about hydropower plant, part of our BEMO project, which is a 50/50 joint venture with RusHydro. As you know, after decades of design and construction, with work on the project starting from as far as the late '60s of last century, the plant has finally been put into operations. RUSAL's first self-generated electricity in Siberia marks a new step in the company's development and very much in line with our strategy.
As I said already, three turbines, or better to call them hydropower units, representing nearly 1 GW are already online. Three more will be launched by the end of the year, and the remaining three next year. Full capacity of about 3 GW is to be reached in the third quarter of 2013, when the satellite BEMO smelter will produce its first metal. Page 14. There we have significant progress, too. The LEP-500 power transmission line to the smelter has already been constructed, and the fourth shell installation has been started in October.
By the end of this year, it will be also finished. By the end of next year, all ports of the first startup complex are to become operational, while the first metal is anticipated already in August. No further than 2016, the smelter will start working at full operating capacity, which is nearly 600,000 tons of metal. Now let me pass to Steve Hodgson, who will speak on the market environment.
Thanks, Oleg. Just a few slides on the general market and the outlook for the next 6-18 months. What we are seeing is that aluminum continues to present the strongest demand growth profile amongst all of the base metals, and for the nine months to September, we estimate consumption of around 36 million tons. Our full year guidance is marginally softer than that of the last quarter. We have revised our guidance to 6% growth year-on-year to 47.3 million tons. At that, China remains not only the largest consumer of aluminum, but the largest driver of growth for aluminum. Our small revision in demand growth is largely a consequence of a slower economic activity in China during the third quarter.
Recent PMI data would suggest that in Q4 we are likely to see an uptick in economic activity and demand for metal likely to increase in China again. Other bright spots for demand, I have mentioned previously, but continue to be positive are the U.S.A., where we have got automotive sales forecasts for this year at an annualized rate of around 15 million units. That is about the highest annual rate of sales since March 2008, and is quite significant in driving aluminum demand growth. For the U.S., we are forecasting growth of about 6% year-on-year. The other main drivers of demand are Latin America and India. In the case of India, it is largely investment in infrastructure as the main demand driver .
Europe, of course, is the global sick man at the present time. We are forecasting consumption to decline by around 2% year-on-year. Construction spending remains severely challenged with the austerity programs being implemented, particularly in the southern European economies. Auto sales in the Eurozone year-on-year are down nearly 8%. I guess most worrying in recent times is that we are also starting to see signs of slowdown in the automotive and extrusion segments in Germany.
Looking at slide 17, despite the lowering of the demand growth guidance, we still see a deficit in aluminum in the market today. If we take a look at the global aluminum balance, we would estimate a year-to-date deficit of around 200,000 tons. That has narrowed compared to our Q2 guidance of 635,000 tons, b ut it is really a story of two regions, China and the rest of the world. Outside China, capacity cuts of around 1.4 million tons in 2012 have created a deficit market pretty much since the first quarter of this year, with a widening shortfall in Asia, North America, and South America.
On the other hand, the China balance has lengthened considerably through the third quarter, largely due to a slowdown in demand, but also through economic and operational policies that continue to support production growth. Oleg will talk about those shortly. Moving to slide 18. I mentioned at the start of my talk that the price relationship to aluminum's fundamentals had become a little bit disconnected, and slide 18 illustrates this point. We are seeing macroeconomic factors and the influence of investors in the market typically driving the price today as opposed to the fundamentals. Warehouse stocks since 2009 have remained largely stable on a days of consumption basis at around 40 days of consumption.
Within that, if we consider stock financing, the real availability of metal is around 12 days of consumption. Despite that stability in stock availability and total stocks, the price has tended not to respond to individual aluminum supply-demand signals. The fact is that the price has increasingly been driven by macro factors and the role of the investment funds in our market, which typically account for around 60% of broker volumes, and the balance being consumer hedging and stock financing. Discretionary hedge funds through the third quarter were largely absent from the market. These would typically be long funds. Whilst technical funds have held mostly short positions in aluminum through the quarter, and indeed for the last six to nine months, so taking a more bearish view in line with global economic cues.
Finally, looking at slide 19 and coming back to the question of premiums. Whilst it is evident that funds are having an effect on the underlying LME exchange traded contract, the premiums are definitely reflecting a more accurate metal availability picture. I have already mentioned the capacity closures in slide 17 that have resulted in a genuine metal tightness in Western economies. We continue to see competition for available LME stocks for financing purposes as well. Around 65% of on-warrant metal today, we believe, is being held tightly by investors for the purpose of financing and generating yields of around 3%-4% at current contangos.
If you consider the mark-to-markets of premiums, they are probably greater than 5% returns. That is slightly less than we saw in Q2. That is actually about half what we saw in Q2, largely because premiums have largely stopped their steep growth path, and we have seen stabilization of premiums somewhat in both Europe and North America after steadily rising since late last year. In Asia, the effect of capacity closures in Australia and one-off quality issues in South Africa and the Middle East did drive and support a further $50 increase in premiums in Japan in the third quarter. Whilst those problems have been resolved, now that premiums are all pretty much aligned globally, we would expect the tight metal conditions and high premiums to persist certainly through the end of this year and into 2013. With that, I will hand back to Oleg for a few comments on China.
Thank you very much, Steve. As usual, we have some news coming from China, the most important consumer of aluminum worldwide. Aluminum production in China in the first nine months of 2012 has grown 15% year-on-year. We estimate full-year production to reach 22 million tons. Cutbacks of outdated loss-making capacities continued this year, but at the same time, approximately 3 million tons per annum of new capacities were commissioned mostly in the Western provinces, including Xinjiang.
Moreover, this was combined with the restarts of some previously idled capacities in the central parts, mostly in Henan Province. All this capacity growth occurred despite the decline in aluminum price on the Shanghai Futures Exchange. As a result, China's aluminum stocks increased 1.5 times since the beginning of the year, as growth in supply outpaces demand. Inventories are expected to climb even further as new capacities in the Northwest are being continuously installed. There are some additional confirmation coming from the sources in China that the State Reserve Bureau intends to buy 400,000 tons of aluminum till the end of this year, as I mentioned.
There is no government approval required as the entire program was launched in December 2008. Then 1 million tons of aluminum was planned for purchase, but only nearly 600,000 tons was bought. Also, they reduced the stock by nearly 400,000 tons in 2010. To conclude with just a few words about smelters profitability in China, we had a chance to look at the recent report issued by the Ministry of Industry. MIIT highlighted Chinese aluminum sector loss of nearly CNY 2 billion for the first seven months of this year, which means nearly 35% of aluminum smelters turned red with more than CNY 8 billion of loss. Thank you very much for your interest, and the management team is ready to answer your questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star star one on your telephone keypad. If you change your mind and want to withdraw your question, please press star one again. You will be advised when to ask your question. The first question is from Alexander Levinsky from Sberbank. Please go ahead, Alexander.
Hello, this is Irina Lapshina from Sberbank. Thank you for this call and just two questions from our side. First, we would like to ask you about your EBITDA calculation. We noticed that segment results indicate that your Aluminum and Alumina business divisions generated around $188 million in EBITDA, but your total number for the quarter is around $130 million. Please, could you explain to us what makes this difference? It is around $58 million. The second question, you mentioned that you produced less Alumina this quarter, and you were buying more from the market. Please, could you explain to us the logic and what is the current cash cost of Alumina production? Thank you.
It is Evgeny Kornilov talking here. With respect to your first question, yes, you are right, the Aluminum EBITDA stands at $181 million, but if you reconcile these figures also with the note, you will see that there are around $60 million of unallocated expenses, so basically expenses which could not be directly attributed to any of the segments, and that makes it $130 million, which you can see in the report. It is all in note five, yeah?
Okay. Should we expect these expenses to appear next quarter, or are they one-off?
They are pretty much a sustainable figure every quarter. Every quarter, we have some unallocated expenses. Talking about the second question, the underproduction of Alumina which happened in the third quarter was primarily in two facilities. The biggest volume came from Kindia, where as you know, we have a plant which went on strike in the middle of the second quarter, and it was idle for all of the third quarter. Production costs in Kindia are pretty high. We actually had positive results from being able to buy this volume in the free market rather than produce ourselves. That gives you a figure which is higher than the market price for Kindia specifically.
Also, in the third quarter, we have been restricting production volumes in our Ukrainian refinery in Mykolaiv. Also, the key reason for that was increased production costs, which in this specific case were caused by very high gas prices that we currently observe in Ukraine. We have seen a certain opportunity to optimize the cost portfolio for the company by finding the optimal balance on Mykolaiv Refinery instead of running it at full speed. So we took down volumes to some extent to optimize the utilization of equipment, and we bought in the market. The market price, which we observed in the second quarter, roughly stood in the level of $310-$315 per ton of Alumina, FOB at the port of dispatch. So it means without any transportation cost. All this price was specifically cheaper versus the two cases which I described. It was cheaper to buy in the market. Okay?
Yes, all is clear. Thanks.
Okay, the next question is from Dan Yakub from Citi. Please go ahead, Dan.
Thank you very much for the call. I really have one more brainstorming question and the second one relates to the market. First question is, we notice that maintenance CapEx is running at approximately $100 million a quarter. Essentially, that is basically the minimum that the company has to invest in order to keep the company operations in reasonable shape. The tax expense is running at about $20 million per quarter. Your earnings before interest, tax, and depreciation, amortization is running at $130. So you only have, let us say, current aluminum prices, at current physical premiums, close to $10 million to service the necessary interest payments. Does that, let us say, mismatch between what the company can sustainably generate in the current market environment? We can discuss the market environment in the second part of the question.
But does that, let's say, mismatch between the cash generation ability and the interest expense, does that in fact worry the banks? Is there any, let's say, pressure from the banks to potentially divest the Norilsk Nickel stake in order to reduce that interest expense and make the business, let's say, more sustainable? The second part of the first question, you may have $1.8 billion of working capital, which was a pretty significant reduction from a year earlier. Is there any more space to reduce working capital from the current $1.8 billion, or is that the minimum that the company has to run with? Moving on to the market related question, we've seen aluminum prices dropping from, let's say, $2,500, $2,600 on LME to $1,900 to $2,000 per ton right now, and obviously premium rising quite significantly.
Would logic be correct if, let's say, if contangos become less pronounced, o r if contango, for instance, in theory, if contango becomes a backwardation, do you think that the premiums may collapse given that the investment demand is almost exclusively dependent on the steepness of the slope of the forward curve? Thank you.
Okay. It's Evgeny Kornilov here. I'll start first with your first two questions. I think you have correctly noticed the progress which the company has achieved on working capital optimization, and, of course, that's something which we used very heavily to balance our liquidity position. There is never end to the story, but you are right. To a big extent, the opportunities which we had in working capital have been exhausted. At this moment of time, of course, there is always something else to improve, but not on a big scale. As we look forward, we also need to factor in situation that we are facing Siberian winters ahead of us, which means the company has to accumulate some safety stocks of raw materials, which means the working capital will slightly increase.
At the same time, it's typical situation that in winter, the speed of railway transportation in Russia decreases, which means that generally there will be more raw materials and aluminum sitting on the railway cars as they are transported across Russia. It's not because of our action, but because of weather conditions, we should expect certain increase in the working capital in the next couple of quarters. Of course, they have a very good chance to once again decrease, once spring comes back. We will continue to work on working capital, but you would not expect huge amounts there. If you look back, you're absolutely right.
We have, I am pretty sure, achieved a very strong result, especially in third quarter, where, as I explained earlier, we have picked up the unfortunate, unlucky composition of LME and quotation period, which resulted in very low realized LME in third quarter. Nevertheless, the free cash flow was managed to be slightly positive. Of course, on top of operational free cash flow, company also received dividends from Norilsk Nickel, which made it very healthy positive. But I think it is quite important to recognize this result, that even at such a low LME that we have observed, the company has been free cash flow positive, which means it has fully served its debt, and there is no question about that. And also, we have spent sufficient amounts to run CapEx program.
Yes, it is not our dream CapEx program, but that is sufficient CapEx program to operate in such environment. I think this is a pretty good achievement. If you benchmark the company across the peers, you will see that actually not everybody has achieved it because we have seen some companies who have been cash flow negative, which means the life could be difficult, but we have outperformed them. Again, it is not, let us say, the end of the discussion, because if you look at our net debt evolution, you will see that the company has increasing net debt.
There is always, of course, a room for short-term borrowing if it is needed to make sure that the company has access to sufficient short-term liquidity lines, which can help to cover the temporary cash shortages if needed. But so far, as you can see from our balance sheet, otherwise, we have been accumulating cash, and our liquidity position was very safe and so far continues to be so. I think the banks basically see it, and they understand it from our reports that we manage the situation. For the third question, I will ask Steve to pick up.
Also, before Steve starts to answering the third question, I would like to make a comment here. I think banks are created to actually get interests from the money lended. Why they would be interested in reducing the interest?
Steve, are you with us?
Yes, I am. I am happy to take this question. The question was regarding the backwardation and whether backwardations will be bad for premiums. Maybe before answering that directly, let us just look at why a backwardation might occur. Really just two reasons that I can refer to. The first is that the nearby demand of metal significantly exceeds supply, in which case there is a short-term price response that would create such a back, or that the outlook along the forward curve becomes bearish, i.e., the future price of aluminum, for some reason, is seen as being at a discount to the current price. Both of those scenarios seem unlikely. The first because although I commented that the market is fairly tightly balanced, there are stocks, and there is availability of metal in the medium term.
In terms of the outlook, then looking at interest rates and the price of oil as a proxy for energy, you would have to assume that the contango in some form or other is going to continue to persist. At the present time, the 2013 contango is around $60, 2014, $140. We sometimes see short-term backwardations when there is a mismatch of positions held by different players in the market, the longs bounce in the shorts. We track this through the Futures Banding report issued by the LME, and there is no real indication right now of any backwardation forming either. Even if there was a backwardation, I would say that typically, financiers tend to be covered for financing purposes, contango purposes, out by three to six months. They certainly do not finance on a hand-to-mouth basis.
The backwardation, a backwardation, if it was to occur, would have to be sustained for a period of, let us say, up to a month and longer, in order for metal to be dislodged, if you will, out of financing deals. That just does not seem likely in the current market, and we have not seen such a backwardation indeed in the market for well over 18 months. That is my summary. In that respect, I think, the conditions to support aluminum financing remain reasonably strong. Consumer buying along the forward curve is sustaining the contango, and we are not seeing a mismatch in the positions of various investors that might cause a short-term spike.
Thank you. It is very clear. Thank you.
The next question is from Barry Ehrlich from Alfa. Please go ahead, Barry.
Yes, hello. Thank you for taking two questions for me. First of all, if you can you share with us how you view the key areas of focus of the new chairman of the board, and if there have been any projects or undertakings of note that may help us understand the new focus of the board under his direction? I also have a question on how you see the key regulatory issues the company will be focusing on in 2013. Which ones are you going to look for improvements on? Thank you.
Thank you for this question. Talking about our Board, I think, again, it is important that the company that size and the shareholders have an independent director as a chairman. I think Mr. Warnig is very much experienced in Russia, and his presence on the boards of many big Russian companies just confirm this fact. We had a number of boards already chaired by Mr. Warnig, and I should tell you that he is a very good and very professional independent director, and we have a perfect chairman here.
Just last Thursday, our independent directors had a dinner for all INEDs, which is a normal practice for the public company. So we think it is a very good development and basically, we are quite happy with the changes in our Board. In terms of new regulatory issues, basically, I'm not aware of any which can impact our business either in Russia or abroad. If you can specifically mention what you have in mind, maybe we can address this question further.
Yes. Well, I'm referring to some of the changes that took place over the last two or three years in the domestic electricity market that were detrimental to your cost structure and whether there will be either further changes or any potential for reversing some of those changes that were put in place.
Well, I think, it's Evgeny Kornilov here. I think talking about the composition of electricity market, all these changes which have happened, they were to a big extent, not only predictable, but they were also preempted by regulators. It was pretty clear direction which was happening, and in which the situation develops. It just was not clear how quickly the things would develop. Even now, for example, if you look, first of all, the reform has been finalized in the first quarter, and to a big extent, the involvement of regulator continues to be as it was predicted.
We see for now that, for example, the mandatory capacity supply contracts, DPM contracts, they are in place, but the cost related to execution of these contracts is not growing as quickly as we anticipated. In fact, it seems to be a slower implementation schedule happening on that side. I think what needs to be taken out as a learning lesson and looking to the future We clearly see that the market is going to behave as two separate segments. We see that European part of Russia effectively happens to be under huge cost pressure in terms of production of electricity.
It means some way it will materialize the price of electricity, which makes, in the long term, the forecast for electricity price grows, let's say, in European part of Russia, which clearly puts a certain pressure for primary aluminum. You still can be profitable if you are producing significant amount of value added products. Our experience in some of the European smelters, and also the smelter that we have in Sweden, confirm that you could be profitable even at a pretty high electricity cost if your product allows you to pay this extra margin, and you also save on transportation cost. It allows a certain formula to operate in this environment.
Macroeconomically, of course, the right area for us to be is Siberia, where the most of the electricity is generated through hydro plant. I would say the situation that a new hydro plant is launched allows us to feel comfortable that the market will not turn into under supply situation like it sometimes turns to be in European part of Russia. The balance of supply and demand is right, and this is the most powerful mechanism that we think will impact the development of the future electricity price in the Siberian region. We would expect that clearly price will not grow at such pace as we see in European part of Russia. It may happen to decrease for some seasonal and some other reasons, but clearly it could be flat, it could grow, but it has not such pressure as in European part.
We think it's the right place to be, and that's effectively how we think we would continue to maintain our competitive position in terms of cost of electricity and production cost. In terms of any additional changes in the market, honestly speaking, there is always a discussion, but we don't really see anything that would be dangerous for us right now. It seems to be quite predictable and quite okay. That's it.
Thank you. The next question comes from the line of Owen Liang from Credit Suisse. Please go ahead, Owen.
Thank you. Thank you, management team. Just two quick questions. One is on the PPT page nine. We see the power here is a negative contribution because it is linked to LME aluminum price, as far as I know, and it seems the aluminum price is decreasing. Could you give me some color on how this is a negative contribution in the third quarter? Second question is on our current cash level. What about the current cash at the end of the quarter, and what will be after we pay all the $400 million by end of this year? What is the comfortable cash level expected by the management team? Thank you.
Yes. Thank you for your questions. On page nine, you see evolution of power. As I said, there were a number of factors which were negative, related to regulated increase in gas prices. You know, gas is used in many electricity generating facilities in Russia. We also had some shortage of water in Siberian rivers, which resulted to lower contribution of our contracts with hydro generators in Siberia, s o which has resulted to these cost increases. At the same time, we do have offsetting factors. You need to remember that most of our electricity is bought in rubles, so there was an offset through weakened ruble. In this specific flowchart bridge, it is shown in the column exchange rate, so part of the exchange rate, positive evolution relates actually to power s o that needs to be remembered. It is a factor analysis which takes every factor separately.
On top of that, we also have some of our contracts are covered by link to LME, as you know. So where the price for electricity changes in relation to the change in LME, and this instrument is recognized in our statements as financial instruments. Therefore, a respective offsetting effect is shown below EBITDA and financial income line. Okay? I know it might be a bit confusing, but that is exactly how the factors work on a separate basis. Your second question was, so cash flow-wise, of course, we receive the positive cash from this contract, but in EBITDA terms, it is not reflected because it is a financial income item.
The second question about the cash. The cash on the balance sheet was reported at $894 million. As I said, it is a pretty comfortable liquidity position. From the history of the company, we will use around $300 million out of this to pay down our prepayment for debt services, which will take us $300 million down. But in terms of our comfortable operating level, we need something like $350 million- $400 million to operate in a safe way, in a comfortable way. That is known from our history. I hope it answers your questions.
Thank you. Actually, the first question, just a follow-up. So if I understand correctly, this time the depreciation of the ruble would have offset the benefit from aluminum price decline. Is that correct?
Yes. I think if you want to look at the actual price of electricity which company observed, I will draw your attention to two charts on page eight, and you will see that all in all, in USD, the price per kilowatt hour was $311, which is lower than $320. So on page 10, we just show it in different areas as per the rules of factor analysis.
Great. Thank you.
You're welcome.
The last question comes from the line of Oleg Petropavlovskiy from BCS. Please go ahead, Oleg.
Good day, gentlemen. Thank you for your presentation. Just a few questions from me. Do you have any expectations on what aluminum price premiums are you going to show in the fourth quarter, as now we are in the middle of November, so I believe you can see what selling prices you will have for the fourth quarter. Also one question on CapEx. You showed a good decline in this figure to about $90 million. What should we expect for the full year 2012? Maybe you have some estimates for 2013, because if you have any plans to reduce your CapEx, it is expected to increase your cash flow. Thank you.
Maybe Steve can address the first question.
Yeah, I am happy to do that. I guess we have got to be a little careful in terms of the guidance we provide. Certainly for the fourth quarter, from a premium perspective, let us go there first. From a premium perspective, the sales mix is likely to support at least the same level of premium, if not slightly higher. We have seen continuing strengthening of premiums in both Asia and Europe, in particular through into the fourth quarter, and would expect those premiums to flow into our revenue during that period.
As I say, the sales mix is broadly the same, so that is supportive as well. If we look at the quarter to date LME price for the fourth quarter, we are at around $1,970 quarter to date. That is the official price as opposed to RUSAL's price. That is around $60-$70 per ton higher than what we saw in the third quarter. They are probably two reasonable indicators of what we would likely see come the end of the quarter.
For CapEx figure, of course, we cannot provide you an exact figure, but I think you can simply extrapolate year-to-date figures, and you will see that it will be in the range of $500 million, which makes you will not be mistaken too much. Thank you very much for all your questions.