(Updates to add quotes, context)
By Pratima Desai and Polina Ivanova
LONDON/MOSCOW, Nov 7 (Reuters) - Russian steelmaker Severstal will ramp up investments by 75 percent next year, a decision which may require borrowing, its chief financial officer told Reuters on Wednesday.
The company announced a string of projects that will see capital expenditure rise to around $1.4 billion next year and in 2020, from an average of $800 million in the previous 7 years.
“A significant proportion of the investment is related to cost savings...including putting conveyor belts in our iron ore mines and saving on transport costs. A few others are related to quality and product mix,” Severstal’s CFO Alexey Kulichenko said.
After peaking over the next two years, capital expenditure will return to $750 million by 2023.
“Each of the projects we are going to invest in has a strong rationale in terms of high internal rate of return and significant (core earnings) contribution,” Kulichenko said.
According to its new strategy presentation, the company is aiming for 10 to 15 percent annual growth in its earnings before interest, tax, depreciation and amortisation (EBITDA) between 2019 and 2023.
Investment will mostly be funded by the company’s cash flow. But some additional borrowing may be required.
“We may borrow from the banks, we may issue debt... it will be moderate, maybe $200 million to $400 million. Whether we borrow or issue debt depends on how the market situation develops,” Kulichenko said.
Although next year’s dividend will not reflect the higher capital expenditure, the company said it expects payouts to reduce as the market weakens in future.
“We will not use this temporary increase in capital expenditure to reduce dividend flow. For 2019 we will pay dividends as if our capital expenditure was a normal $800 million,” Kulichenko said.
“Where dividends are this year is unlikely to be repeated because the market situation - definitely we do not expect (it) to stay like that,” he added.
The company previously forecast steel demand growth in its home Russian market of 3 to 4 percent in 2018, but now expects 1 percent growth this year and next.
Global steel prices also paint a precarious picture, analysts at BCS Global Markets said.
“Investments in the steel sector (excluding maintenance and required repairs) look risky to us, given that steel prices are already falling and should decline further due to oversupply in the industry,” BCS analyst Oleg Petropavlovsky said.
Severstal said it expects steel sales in the fourth quarter to decline, though this will be offset by a strong performance by the mining division. The company is also a producer of iron ore and coking coal.
“The situation in the market is quite challenging and prices are softening...but all-in-all we expect comparable quarters, maybe even slightly stronger because of mining performance”, Kulichenko said. (Editing by Jason Neely and Alexandra Hudson)