Jastrzebska Spolka Weglowa SA

WSE:JSW

Earnings Call Transcript 2019-Q1

[Daniel Ozon, executive]

Ladies and gentlemen, I'd like to welcome you all very cordially at this Q1 2019 earnings session for the JSW Group. Just as in every quarter, we prepared a short presentation and we'll walk through the operating results, the market environment, JSW Group's investments as well as JS Group's (sic) [ JSW Group's ] financial highlights, and then we'll walk on to the questions.

So in Q1, in numbers, so the highlights. So if we look at coking coal production, we were able to raise production versus Q4 by 3.8%. So this means that we got up to 2,396,500 tons, and so this will be discussed a little bit later. If we look at coal production, so this fell by 826,000 tons. This was a deliberate decision as a result of a shortage of semi-soft type 34 coal. This is as a result of the events that happened [ in Szczyglowice in October ].

If we look at the average coking coal price, it was PLN 700 million. This is an increase of 8% over Q4. The average coke price grew by more than 4% compared to Q4 2018, and it was PLN 1,173. This enabled us to -- so this enabled us to get an EBITDA of PLN 740 million. So this is more than a 29% EBITDA margin, and so then the net result was PLN 409 million and an important parameter that we monitor.

We take great pains in our strategy to ensure that we're going to be able to run up -- ratchet up the run rate, so we look at corridor works. And so after the changes we've made, and we advised you that we decided not to summon the services of the external companies using in-house crews. And so that explains, to some extent, why we have higher head count. And we've done more than 17.7 kilometers of corridor works, and this is a trend that we intend to uphold.

And if we look at some of the important events in Q1, we see that some of these events completed in Q -- or in April. So we had extraordinary shareholder meeting on the 3rd of April, and we received the consent in order to buy a 95.01% stake in PBSz. So the negotiations lasted several quarters. We received the consent to try to get them, but we've been able to include that -- conclude that, so that will transpire on May. We've also extended our talks with Prairie in terms of the ability to take control of the projects that Prairie has in Poland. So the advisers, both legal and financial, are continuing to work. We're talking Prairie about our Supervisory Board and the regulatory authorities about the deal structure and about the consent.

On the 21st of February of this year, JSW, along with our trade union organizations, signed an agreement on an employee pension scheme. We signed an agreement with PKO BP, a management agreement, and so now we're implementing this consistently. So we've had -- we'll have this also in our daughter companies, so this will be in the coking companies, for example, in PBSz.

What else have we been able to do in Q1? We've given you some press releases about this subject. We know the market's sentiments amongst the debt markets, banks, so if we look at the power sector and the mining sector and the power sector based on coal, we looked at the opportunities to issue bonds and do other things, but we were able to collect PLN 1 billion on the Polish zloty, and so this is debt financing. And we have PLN tranches, euro tranches and dollar tranches to minimize the FX risks linked to our revenue portfolio. In a variety of currencies, we have several different banks in our consortium. So we have BGK, Bank Polska Kasa Opieki. We also have PKO. We also a Chinese bank, ICBC. This is an important step. So the appetites of Polish banks, there is no bank from Western Europe, for example, as you can see, but we're pleased to see that ICBC is participating. We received a positive credit decisions in Warsaw, in Luxembourg and in China and so as we can obtain the mining assets from Prairie, if that's possible, we're counting on being able to get financing from the Far East as well.

So this group of banks lending us money has been expanded to include the European Investment Bank. It finances basically investments that are environmentally minded and reduce emissions, so the turbines we'll talk about on Monday. So basically, there's an agreement signed between ourself, JSW KOKS, and [ Edafoco ] about putting in a turbine 28 megawatt in Radlin. And so we also have the construction of methane-driven engines in all of the JSW mines.

In Q1, we made a management decision to spin-off Bzie-Debina from the multi-section mine. So we have this integrated mine with 3 different sections. Last year, we had the accident in Zofiówka. And there are a variety of relations with the mining authority. Then we have the Borynia, where we have the greatest slopes. Then we have the Jastrzebie mine.

So to run mining efforts effectively. So to build a new mine, we decided to -- needed to spin off that mine as a separate mine. We have a concession for Bzie-Debina 2-West. So we have a large amount of recoverable resources there, 114,000 tons of coking coal. We anticipate a positive decision in the near future to have a positive decision for the Bzie-Debina 1-West, which will give us another 71,000 tons. And so if there's going to be any questions, we will happily respond to any detailed questions you might have.

But also important is our employee safety. After the accident last year, we decided to make a number of changes, make new investments in terms of the location of our employees, our machines. So we've purchased 170,000 kilometers of cable -- fiber-optic cable, in order to have wireless, basically, communication. So Pniówek is the first mine where we have it fully -- we have fully digital communication. So we've also built a central warehouse for rescue services. We've got the most up-to-date equipment that proved itself on the most difficult efforts last year.

We've introduced -- in all of our rescue teams, we have 4-shift systems. We have modern training system along with a rescue station so we will never save any money on safety.

So in order to improve our relations and cultivate deeper relations with the municipalities where we run our activities, including our mining activities, we've set up the JSW Foundation. This foundation has certain important aspects in which it will be active, but we will make sure that the relations with the municipalities where we operate are best as possible there's such -- for 16 such municipalities.

Then we have the operating results of the group. I'll ask Tomasz Sledz to say a few more words about the upcoming slides about our activities here.

[Tomasz Sledz, executive]

Good afternoon, ladies and gentlemen. So if we look at mining production, it was as follows: in Q1, we extracted 3.481 million tons of coking coal -- of coal. And so it's 2.396 million tons of coking coal and 1.084 million tons of steam coal. So we had a decline. This was a result of the event that with we had in Bzie-Czechowice. I'll talk about this in the upcoming slides.

But across the year, in 2019, in the technical and in the economic plan, we anticipate that we'll mine more than we mined in 2018, and we intend to deliver on that. If we look at the percentage of coking coal -- of total coal, it's around 68%, so it's 4% more than it was in Q4.

If we look at the mining cash cost, it was around PLN 429.54. So it's a little bit up --sorry, less, it's a little bit down from Q4 when it was PLN 470. Then we had CapEx. And so we had the production down by 6.8%.

If we look at the inventories, it's 718,000 tons. At the end of December, we had 791,000. We tried to maintain somewhere between 700,000 and 800,000 tons of coal in our inventory.

The CEO has already talked about corridor works. You can see the consequences, the effects that we achieved. So we've added some 50 new wall face crews. So this will enable us to do the 17,700 meters. And so basically all of this work was done so the corridor works, which were a pain are now starting to go quite well this quarter, these corridor works.

So then we have the coal production. So we had 12.8 million tons of production in 2015, and so we're now up 11% to 14.2 million tons in 2018. We're doing more and more meters of corridor works on our own than the external companies. So we had 22.9 longwalls on average in Q1, and we want to have an average of 24 over the course of the year. So we want to improve our efficiency.

So on the next slide, we show you the longwall where we had the event. So this is #23/1 in Knurów-Szczyglowice mine, in the Szczyglowice section. And so perhaps you have to stand up and I can show you, in fact, where this tragic event took place.

So it was here underneath of the longwall. So it's a shock wave. So this was a very strong shock wave. There are no employees, after analyzing this situation, we came to the conclusion that there is too much pressure there and there was a danger for employees and so after we made the analysis that we decided not to continue longwall working. So as I'm showing, we were going to continue mining for another 60 meters in the mining pits, but we decided not to do that because it was too big of a risk. And so we lost basically 63,000 tons. We've achieved, however, our plan. We caught up for those 63,000 elsewhere. And so we also performed the technical and economic plans, so we're ahead of the plans that we had for 2018.

So ladies and gentlemen, before I go on to giving you a short presentation of JSW KOKS, perhaps the very beginning of our presentation I'm going to give the floor on the financials. I should talk about the gentleman sitting on my right, Mr. Radoslaw Zalozinski. Some of you may know him from KGHM. For 18 years, he was responsible for finance in KGHM. He's joined us at JSW, and he's a strong pillar in our financial division. The whole management team is pleased that he's with us.

And so -- and the next portion of the presentation, [indiscernible] will talk about the financial section after we complete the market discussion.

So if we look at Q1 and the situation in JSW KOKS, so we had a decline in production from 872,900 tons to 826,000 tons, so it's a decline of 5.4%. The utilization of production capacity is down by 4 percentage points. It's still above 91% in Q1, however.

The cash conversion cost was PLN 170.97, so PLN 170. And so then if we look at the stock of coke as a result of lower production and the performance of contracts for our business partners, we came down to about 210,000 tons compared to similar quarter. In the previous year or the previous quarters, we ranged there, somewhere between 264,000 and 225,000.

So as Tomasz Sledz talked about, the shock wave that took place in the Knurów-Szczyglowice mine, I mentioned that in the early months of this year, we also had a mining event, a geological event, which meant that from PGG, there was a disruption in the delivery of materials. We needed type 34 in order some -- in semi-soft coal in order to maintain this rate level of pressure in the chambers in coking plants. And so the availability on the Polish market is limited. And so that is why the extra stock we had of semi-soft coal was -- got used up because of these 2 events, so we had to reduce production and we've been able to buy this type of coal elsewhere. But as Tomasz said, so this production will be recovered, and so we'll be able to catch up for that over the rest of the year through the subsequent quarters.

And now I'll ask Mariusz Drapala to say a few words about the market context.

[Drapala Mariusz, executive]

So here, we usually talk about various ratios that depict the direction of growth in the marketplace. So we make comparisons to the similar quarter of the previous year as well as to the previous quarter.

So based on our observations, and if we look at the ratios between Q1 2019 and Q4 2018, we see that there was a decline in the EU of 2.1% in steel production compared to 4.5% increase around the world. So if we look at the steel prices, both with respect to flat goods as well as rolled goods, so rods, so in this period, we saw the prices fell substantially in Europe by 15.9% for flat goods and 13% for rods.

If we look at the coke market, we can see that in the European market, we have a relatively stable position. There hasn't been major change. So the correction, if we look at those 2 quarters, we compare, the difference is 0.4%, but we see more differences if we compare it against the Chinese market where the decline was 4.7%. So if you look at coal prices in each one of the categories, we see decline somewhere between 9.9% and [ 5.9% ].

So if I move on to Q4 and Q1, we can see that the trend of price cuts is visible on steel products. So the flat goods saw a decline of 7% almost and almost 3% for rods. So steel production across the world fell by 1.8% from Q4 to Q1, whereas between Q4 and Q1 of this year, we had the same level. And we talked about some of the reasons for the decline in Q3. We told you about that during the most recent reports or earnings session, so it seems that these problems have been solved on a permanent basis. As we analyze the market trends and the prices for coking coal and coke, we can say that the changes were not so dynamic or volatile as in previous periods.

If we look at the coking coke (sic) [ coking coal ] prices at beginning of the quarter, there was lesser interest in China because of the new Chinese year -- or the Chinese New Year, so there was some price adjustment, but once the market regained its liquidity, prices moved back up and the prices have remained steady.

So we saw some corrections in Q1 and Q4, this is because of the -- if we look at Chinese coke, we can see that there's some substantial stock in ports and in the various locations. So if we look at the prices commanded by JSW on these markets, so we used 2 models: the first model is the average of the TSI Index, and we utilize the average quarterly prices; the other model is the one by Nippon Steel, where it has certain time shifts. So the price we commanded, as mentioned by our CEO, if we look at this in dollars, it was a little under $188, which when compared with the average prices in Q1 of $206, gives us a level of price over 9% below the index price, the spot prices or these prices. And so if we make a comparison against the Nippon Steel model, then the reference prices is $210. So the difference is 11% because it's a slightly bigger difference.

As I mentioned, the coke price in Europe seems to be quite stable. The rate of change we're seeing in China has not translated into the prices -- or has not affected the prices we see in Europe, so the price ratio between coal, hard coking coal and coke, both in Europe and in China, despite the volatility, was the ratio has stayed at a very good level for coke producers, which means that the process, as an entirety, is able to generate the proper level of profitability.

If we look then at steam coal, what should we draw attention to? Over the most recent few months, we've had a discount in the price in Europe, in particular, but across the world as well. So we had roughly prices of $100, at the end of March plummeted to under $70 just below.

So as you can see on the right side, the prices on the Polish domestic market, this is a result of the indices that are published. So we have the Polish power market price where the coal is sold to the power sector and the heating sector. Well, these prices are higher than the ones we see in the ARA market index. So you can see on the left side how we compare with this index, and so the prices we've achieved are slightly higher than the indices, as published.

If we look at the sale of coal produced in the JSW Group, as we compare this to Q4, as a result of the events that occurred and the level of production, our sales were down by 4.1%. I want to draw your attention to the fact that this decline is a result of selling less steam coal because we had 1.25 million. So it's roughly 200,000 tons less steam coal in Q1 as opposed to Q4 2018, from 1.25 thousand tons to 1.02 thousand tons (sic) [ 1.25 million tons to 1.02 million tons ]. So we can say that the markets enabled us to increase our prices. So we had an increase in price of 8.8% for the sales to external customers of coking coal and some 8%. So we've had PLN 1.3 billion in revenues, 8.8% higher than the previous quarter.

If we look at the sale of coal to internal buyers, we're essentially at the same level. If we look at coke sales, we've been able to generate a volume of 845,000 tons. This is down by 14.1%. Again, here, we should emphasize that the volume we sold in Q4 because of the dispatching schedule, so also the Marine dispatches, this was rather high compared to previous quarters. We could say that the level of sales is quite close to what we saw in Q1 2018 because at that point in time, it was 849,000 tons and we had 148,000 tons in Q3, so for example.

So if we look at the changes on the market, for coke, we can see that the price for coke was up by 4.7%, but this increase in the price up to PLN 1.173 (sic) [ PLN 1,173 ] per ton did not offset the extent that was desired for the shortage of volume of coke sold, and that's why the total amount of revenue was PLN 1.1 billion, so down 11% from the previous quarter.

So what the director was saying, based on independent of us, this is the access to ports. We know this is a bottleneck. The amount of coke being imported into Poland and the limited port handling capacities, we have to do quite a bit of gymnastics in order to have access to the loaders onto ships, and so we have to have access to that, but we're doing the best we can in line with our contractual commitments, but sometimes we've had these ships between one quarter and another.

And then I'll ask Artur Dyczko to say a few words about our investments in the JSW Group.

[Artur Dyczko, executive]

So ladies and gentlemen, in Q1, we always talk about the trend which is the result of the great intensity of work we did in Q4. We always explain to you that the payment terms we have in place means that what's happened in Q4 is in the financials of Q1, so you had it in front of you here. So we had CapEx that was lower by 38% because it was down to PLN 394 million, but you can see that there was 62% growth over Q1 2018.

So if we look at what we wanted to do, we did everything that we wanted to do in terms of the physical scope of work. So there might be some questions about Bzie mine as well as the coking battery revenue. So the execution is a result of the changes we've made in terms of how we make investments to give the proper staffing to those departments and having the people, who are going to be able to deliver in the future, the best possible results. Again, the market is quite difficult amongst the external companies. What we've said to you on a quarterly basis, we haven't seen improvement here. Mr. Sledz showed you what's been going on with respect to corridor works. We're simply having to do that work ourselves, and we're working on improving our efficiency as we've taken over that work. So the total CapEx was PLN 637 million, it's up 114%. So -- and coke segment.

And so if we look at the directions of our investments, it's the resource base, we have to have access to the resource base. This is the last moment in time, and Mr. Ozon has repeated this in many interviews. We'll enlarge our portfolio of assets and prepare that work -- the front of work.

We see changes coming from across the world in terms of the role to be played by mining. This could be difficult for us in the future, so we're doing as much as we can at the present time to build.

I said this at the European Economic Congress. Every year, we are going deeper by 6 meters. All of these investments, let me go to the next slide. What's important here as we're reporting to you the progress along individual sections.

So as Mr. Sledz said, once you have the longwalls, then the coal can be hauled out. But if we have some problems, we know that they're going to arise, so we're making sure that the shaft is deeper. We're building new levels and we're analyzing the available technology across the world. Mr. Ozon is going to talk about that. For technical reasons, we might not be able to extract some coal, but our plan is to be able to come back to that at some point in the future because we have good quality of coal, that the best quality coal is the most imprisoned because since it's imprisoned, we have a large amount of methane there, and we'll talk about that with you.

We're also pleased, and I talked about this at the most recent results conference, as we look at the CapEx to -- the ratio of CapEx to run rate, we're almost up at PLN 100. So the CapEx we're going to have this year will exceed PLN 100. So we're starting to build a mine. So I can tell you, in 2012, we had PLN 109 per ton. In 2013, it was PLN 101. In 2014, we're starting to down, we had the crisis. We're at PLN 97, then we were at PLN 48.9 in 2015. And now, once again, we're back above 100, so we're starting to build the mine.

What we're most interested in is to ensure that the construction of the mine proceeds without disruption and for it to go quickly, that's why we need PBSz. And as Mr. Ozon said, we're going to move forward swiftly.

Please remember 1,080 is the level that we're going to be talking about, and in Budryk we're going to talk about this level as well. This is a flagship investment, here the level is 1,290. This is the deepest longwall in the world that effectively extracts coal.

Then in Pniówek, we're going to have that level of 1,000, and we're going to deepen the shaft there. If we look at our CapEx in KOKS, perhaps they're not causing us to sit back in our seats. But as we've told you, we've selected the general contractor for the power side of things. We're moving forward in terms of selecting the contractor for battery #4.

The other investments we have in the Radlin and Jadwiga are quite advanced. So I hope in vacation time, we'll be able to tell you a little bit about the most important investment in the coking plant, so the modernization of the battery #4.

What's very important is that this modernization of the power generation unit in Radlin is part of the energy strategy we have. And so we'll be able to approve that. And as 2022, we should be self-sufficient in an area where you can observe that has quite a bit of volatility. So we'd like to mitigate the risks.

So I can respond to any questions you might have later. Thank you very much. And now I'll ask [ Vic ] to say a few words about the financials in Q1.

[Unknown Executive]

Thank you very much. If we look at the economic results of JSW, we should emphasize stable revenue comparing Q1 2019 to the same quarter of last year. So Q1 2018, so it's PLN 2.5 billion, and the group is quite stable.

If we look at the operational results, it was lower. We've already talked about some of the reasons for that. I'll come back to that later when I show you the bridge and talk about the individual components. And so net working capital is also lower, and that's because money was put into a closed-end fund. And you've heard about this many times. So the net result here is lower than the result in Q1 of last year, and this is a result of the -- operating result that I talked about previously.

So on the next slide, I wanted to show you some of the EBITDA drivers. So if we think about EBITDA in Q4, it was PLN 612 million in Q4. So the increase was because of selling more coke and coal, we had higher prices, and those 2 factors supported us strongly.

If we look about coke, this was a negative influence of PLN 161 million. And then if we look at the impact exerted by coke prices, this supported us. And so other factors which affected our EBITDA, this was a total of PLN 126 million. One-offs compared to Q1 of 2019 from Q1 2018 wasn't -- they weren't very big. There was the fire in the Knurów-Szczyglowice mine, and then this was partially offset by some of the compensation. And we had the tragic events that you're very familiar with, of course, that took place in the mine there.

If we look at the impact exerted by operating segments on our EBITDA. So the coal segment had an impact, so the coking segment was basically neutral. And if we look at the other segments, they didn't have a major impact on the operating result of PLN 740 million.

You're probably most interested in the cost composition or structure. We've talked about this a lot at the previous conference. For example, when we signed up 2018. So you're telling you why we had higher employee benefits. The first one was when you compare Q1 of this year to Q1 of 2018. So we had the 2 agreements that we signed with the employees and the social partners, and this contributed to higher employee benefits.

But we also have to remember that the employees -- when the company was in a much more difficult liquidity situation, the employees showed a lot of understanding, and this is an unprecedented thing.

If we look at depreciation and amortization, you were informed of the impact exerted by the new IFRS standard and what the cost impact is. So the impact was PLN 25 million in Q1. If you look at the costs of energy, as with respect to most production companies in Poland, we have to face higher costs of energy. So this will probably be of interest to you and there may be some questions.

If we look at external services, so we have higher salaries in all businesses across Poland. And that means there's a lot of pressure from the suppliers to have higher salaries too. And if we look at the cost of energy, this is a natural factor that contributes to wanting to raise the prices.

If we look at profitability and liquidity, you can see that ROA -- ROE and ROA are down. If we look at the cash flow, I think you're interested in the cash balance. So it's currently PLN 1.6 billion. And if we compare this cash flow to Q1 2018, we can say that what happened in March of this year didn't change much from March of last year.

Then we have the net financial debt. As you know, the company has cash, but the group doesn't have much financial debt -- financial section, about PLN 26 million, from JSW KOKS. And so that means that this ratio is negative and suggests a good situation for the company in terms of liquidity.

[Unknown Executive]

Thank you very much, [ Radek ], for discussing this quarter. So now before we go on to the questions, I wanted to say a few words about technology, and we've already informed you about this. So I hope at the next results conference, we're going to be able to share with you a short film clip about the independent rockbolt support system, and we'll see if we're going to be successful in June to have a fully automated shear.

So this independent rockbolt support is manufactured by Komatsu. This will leave the U.S. at the end of May. So one of our Presidents was there to do the acceptance, then we'll bring it down to the bottom of the mines. We've decided -- this took us a year to work with the mining authority -- it's more than a year to work with the mining authority about this. And the mining sector across the world uses roof bolt supports. [ Our miners ] needed a lot of time to become convinced and to agree to depart from steel shields so we should become more effective in terms of tunneling these tunnels. We're going -- we're spending PLN 300 million, PLN 200 million along with the equipment for these steel shields. So the average cost of tunneling a roadway is roughly PLN 16,000. So we're going to use PLN 10,000 in the model. Maybe not in the first phase but in subsequent quarters, we have to learn how to do this.

Here, we'll use external adviser support also from Poland, people who work in Czech mining sector. So the Czechs, the Russians and the Australians in some of their mining and geological conditions, utilize these rockbolt support systems. So this is not just vertical work but also horizontal work. And so we want PBSz's competencies to be utilized here too. So we want to roll this out. So this is the mid- to long-term strategy. But I hope by Q3 -- well, this equipment will be assembled in the mine below ground and this would enable us to do the roof bolting -- the rockbolting as soon as possible.

And so we'll have some independent roof bolt supports. And then we'll invite you to take a visit because it's -- in the first time it's used in the Polish technology and the Polish sector. And so you know that in KGHM, they have totally different raw materials. They'd use rockbolt supports, but it's a different type of resource, of course, and different arches. But Bogdanka is interested in working with us. This is another step towards full automation. And from automation -- full automation, we're a step away from full autonomousness. So we're analyzing the ability to buy a fully autonomous longwall shear system. Australia is way ahead here, and so international producers are making available the analysis. So there are a couple of shears that are used. So we -- I hope we'll be able to sign a term sheet with the key conditions to purchase such a full autonomous longwall system. This is our response to the rising costs as processes become more and more difficult. So we want to keep these costs under control.

Ladies and gentlemen, the next thing that I wanted to tell you about, we took up the obligation or the efforts to calculate our carbon footprint. We have more and more topics about that with -- our discussions about that with our shareholder meetings. So we did the calculation for the entire group. What have we seen in the recent periods are customers who pick up coke or coal and produce steel. They're selling it to various markets. Denmark, Scandinavia are very much at the front of the pack in terms of understanding the carbon footprint and the steel products they're buying.

So we can see the price represents some 40%, 50% of the decision, whereas the rest is the carbon footprint. So we have an adviser in terms of calculating the carbon footprint of roughly 8 million tons. And so we want to report this transparently in order to be able to give more and more information to the shareholders about the subject. On this pie chart, you can see that 12.5%, 12.4% is from JSW KOKS, 86.6% is from JSW because 1 ton of methane is 28 tons of CO2. It started at 21 then it was 25. Now it's 28.

So we're the biggest producer of methane in Poland, not in the world, without new acquisitions but -- so our CH4 emission, we want to reduce, so methane. This was a matter of how we can complete our policy of utilizing these methane-driven engines. This is what European Investment Bank is financing. And so then we should have another 50 megawatts of these engines. So these are 2- to 4-megawatt engines at each one of the mines. So in a few years, we want to be energy self-sufficient and then we have the investment at the Radlin coking plant. And so we have -- this will save us more than 1.5 million tons of CO2 every year.

As we've said, we're moving deeper and deeper. So as you go deeper, you have more methane. So if you have the same run rate but you're deeper, then you have more cubic meters of CH4. So we can probably save 2 million tons of CO2, and a lot of that is -- methane is in the ventilation areas. So we're talking with suppliers of technology solutions. They are not economically viable in the long term, but there is progress being made and we're going to follow what's available on the market and implement that.

We've also looked at our peers from the mine industry. There's a large number of multi-commodity producers. So [ Everest ] is one. They have 15 million tons of coal production on net basis. They also have deep mines. They also have methane in their mine resources.

So ladies and gentlemen, before we come on to the questions, I wanted to say a few more words. In recent weeks, a lot has happened in terms of the discussions concerning China and the U.S. 1 to 2 months earlier, there was a lot of discussion to what extent this trade war will cause China to stop buying coal from Australia. We don't see major risk because China is going through a huge transformation in its industry. They're taking care of their environment and they can't do this without the best quality products, coking coal and coal. And so we've talked with traders and suppliers from the Australian market. And despite the fears, we can see the coal volumes being quite strong, and they're being delivered to the Chinese market. And we don't see any major risk factors, whereby this trade war would cease the flow between Australia and China.

What's happening we -- in China? We see the smallest mines being closed down, the ones that are unprofitable. So their ability to mine coal on their own is falling. On the supply -- on the demand side, the European market does generate some risk factors, not for Mittal -- for ArcelorMittal, where we're selling our process to several of his plants. Of course, they are confirming the amount of coal that's to be delivered this year. Mittal is a big customer with a large number of locations across Europe. We're -- he's using coke. They are not able to reallocate -- allocate coke from elsewhere into Europe. So based on our talks with customers, we believe that what's going to happen in the second half of 2019, we might not see any growth in automotive, so the sales of cars and metal sheets.

But in German market, we see there's a slowdown and decrease in sales of diesels in Germany and others. They're starting to curtail the amount of number of cars with diesel or gasoline engines that can go into the center of the city. So you can remember how Volkswagen, a few weeks ago, started their sales enrollment program for electrical vehicles and their website -- that's not because of the massive interest. So we can say that in 2020, there could be a rebound and new models of cars coming to the market. So we can anticipate that car sales should move up.

Then there's the consumer sentiment in China. We saw the decline of sales of cars in China and manufacturing -- the best German brands, the luxury brands, are exporting their cars there. We talked with our customers. From the U.S, we're talking about the customs duties from the U.S. that would close off the market for European cars. It doesn't seem that these customs duties would be implemented. In fact, that would lead to a decline in exports of cars to the U.S. In other segments, the consumption and the demand seems to be quite stable.

That would be more or less it in terms of a brief wrap-up of Q1. So I invite you to join us now for the question session. [ Pawel ] asked me -- it's not the case that there's a preference, but he already had his hand up and he was waiting for 10 minutes.

[Unknown Analyst]

Perhaps I have a few questions. On one of your first slides, you're showing the forecast about the number of longwalls to be operational this year. Should we treat this that you're going to have changes in your production because of having a smaller number of longwalls, you would have lower production? That was my first question.

The second question, we see hard coking coal is quite buoyant, whereas semi-soft is following the path of steam coal. To what extent should we increase your discount against the hard coking coal prices because of the falling semi-soft prices? Will you pay bonuses in Q2 and in the full 2019?

[Unknown Executive]

Thank you very much for your questions. So the number of longwalls and the correlation with production is quite clear. As we informed you at the most recent conference, so in Q3 and Q4, we have strong production in growth in Q4, less in Q3, and we should be stable in Q2. So we've given you the production forecast. I assume that Q2 will be close to Q1 and we'll have major growth in Q3 and Q4. We'll try to catch up last year after what happened with parcel H in Zofiówka. And that's why we used up some of what we had. And that's why the market reacted the way it did to our production report. I'd like to uphold the position that we want to increase production by several percentage points compared to the previous quarter. And so the biggest uplift in production will take place in the latter half of the year.

So your comments are correct. I think there are 2 aspects. There's the correlation of semi-soft coal with steam coal prices. Mariusz showed you how this is falling and how you're analyzing it. This next thing is the higher quality coke and the requirements of producers to have the best premium quality coal grades and more of that than semi-soft. And so we should anticipate some discounts of several percentage points. I'm not going to tell you how many means several, but we'll see that in our basket.

In terms of the bonuses, we confirm what we communicated after the first half of the year. We'll sit down and look at the first 6 months of the year, and then we'll see what's happening in Q3. We'll see the trends coming forward into Q4. We'll sit down with the social partners to determine whether we can afford it, to what extent we can afford it, and then we can talk about one-offs if the analysis will be positive.

We still have a few months of events -- market events before us. We don't see any major risks amongst -- on the production side. This is geology. We don't have an impact on that. There are no major reserves for the last 2 years we've invested. We've had higher CapEx in corridor works. And doing the shields, we have the progress we want to keep running up the run rate. But we still have several months in front of us, and then we can talk about the one-off if that conclusion is reached, we can talk about that in the latter half of the year. Next question?

[Unknown Analyst]

I wanted to ask you because you mentioned ArcelorMittal, the decisions that were made recently to limit production in Kraków. Can that decision have an impact on your results? Are you concerned that if they reduce production in Kraków this could somehow have an impact on you?

[Unknown Executive]

No, we don't see that risk. We had a meeting with ArcelorMittal, and we confirmed that the size -- or the quantity of delivery [ to Arcelor ] were -- are confirmed. There's no plans to reduce the production of coke. What it wants to do with that coke, it's a matter of its own internal policy decision. And how they want to allocate that coke production to various -- whether it's going to be the plant in Kraków or if they want to send it elsewhere, that's going to be their decision.

[Unknown Analyst]

I wanted to ask you about Slide 34 and payroll costs. They were above PLN 1 billion, and this is something that was a bit surprising. In terms of your guidance for the full year, if I remember correctly, the full year cost is going to be about PLN 3.5 billion. Is this something that you're going to be able to maintain because you have the acquisition of PBSz?

[Unknown Executive]

We assume that we'll keep this under control. Up until now, we had some -- well, we had some increases in headcount in Q1. Of course, we have been hiring people into this company, JSW, off and on, because we had the costs of external services but also the efficiency or effectiveness of security protection. So we decided that we should bring this in-house because too many things were slipping through our fingers. So payroll expenses moved up, but invoices from external companies fell. But if we look at retirement, the number of people who are retiring and people moving in from our training and mining company, see, we can uphold what we said at the previous meeting.

[Unknown Analyst]

I wanted to ask about the production mix. How much hard coking coal that you're going to have a major impact, a major increase? This is what we're going to uphold. The investments we're making are more or less in line with the schedule we had planned. So 70%-plus of the product mix should be coking coal. If we look at the contract with Arcelor, it's enforced until the end of 2020. So I understand that if Arcelor wants to renegotiate something in 2019 or 2020, what's sort of the termination of that contract? Or is that possible?

[Unknown Executive]

So this is probably a commercial secret. You're wondering to what extent -- ask straight out, we don't see that risk that the quantities will fall off. We just don't see that risk neither after 2020 nor before. Please?

[Unknown Analyst]

I have a question in terms of this rockbolt system. I understand that there's some durability as to equipment. To what extent will the costs be lower? How much will the company earn as a result of utilizing the solution?

[Unknown Executive]

Thank you very much, [ Mr. MP ], for this question. So if we add, we have PLN 16,000, the cost of tunneling. The cost have moved up substantially over the last 2 years. Part of that is steel cost. Part of it is employment cost. We don't assume -- after we complete the implementation phase, that the cost would be higher than PLN 10,000. So we see a major decline from PLN 16,000 to PLN 10,000. As you know very well, we're talking about more than 70 kilometers of corridor works per year. So this is the first equipment. We're not going to do it in all of the mines. It's not a possible to use in all mining and geological conditions. Mr. Sledz may have to do a lot work here, along with the team, along with the mining authority that's worked on selecting this spot as we made this decision, so risk/reward. So we're able to go faster in tunneling, lower costs, less steel.

On the other hand, we have to make sure that safety is a paramount question.

So we've done this first implementation in the Polish mining sector, and so we have to do this well. So partially, we'll have to roof bolt systems. Some extent of this will be done with arc systems. And so I asked Mr. Sledz to continue working on this. We see other parcels where this could be done in the safest fashion. We're not going to do this 100% across all of the quarter, where it's just too early to talk about that. But you can see the benefits as why most of the deep shaft mining uses this system. This is something that's been going on for years before market actually started to close British mining sector. The British mining sector utilized this rockbolt system and extended the lifetime of these mines by decades. We see that in Czech Republic, where they have a similar rock mass, that they have the same system. So we want to continue utilizing this. But safety, of course, continues to be our priority.

[Unknown Analyst]

I'm from PKO. I have a question about the acquisitions. There was a statement made by the Ministry of Energy recently that you were asked to analyze Debiensko as a project. I wanted to ask you whether or not you've completed this analysis? And does this affect your acquisition decision?

[Unknown Executive]

We've been working with legal advisers for a shorter period of time. We've been working with financial advisers for a year, with the legal advisers less -- with the financial. And we're working on selecting the proper acquisition strategy should we acquire the assets or the company. And so we're analyzing Karski separately and Debiensko separately as a company and as assets. So we see added value because this company has been listed on several markets, a lot of efforts into collect [ PLN 1 billion ] if we look at our cash system, cash balance.

So if we were to want to make a decision to build one or more mines, we know how much money you need to have to do that. And that's why we know where we are in these business cycles. And that's why the money for acquisition and building a mine, we have that money. We've accumulated that money for the future. So in our discussions with the ministry, we're analyzing all of the scenarios. We've had a discussion with the Supervisory Board. We'll have more discussions with the Supervisory Board as well as the majority shareholder. We'll make a presentation here. Several aspects of these transactions are being considered. It's too early to say which direction we will follow, but we would confirm that these assets are of interest.

And I'll reiterate that the ability to gain access to 0.5 million tons of resources by utilizing the infrastructure at [ Czechowice ]. And then as we have PBSz and having access, that's why we started doing work with the Chinese to have access to debt. And so then it would be possible to get financing for 12 to 15 years. If you look at Bogdanka, you see the results of Bogdanka. You can see how much different the conditions there are. So in some of our mines, we have slopes of 12%, 15%. So you can see this in Budryk or -- where you have basically longwalls that are 1.5 to 2 kilometers. That's why we have different costs. So the lack of methane is quite important, for example, in diluting coal basins. And that's why they're able to have mining cash costs that are substantially lower than in [ South Asia ].

So it's possible to have technological cooperation, and that's why we're cooperating with this letter of intent with Bogdanka. Give us a little bit more time. We would like for these positions to be fully discussed. We have to get the corporate consents. And so we're waiting for certain research analyses. And so we hope that we're going to be able to inform the market about the final decision. Please? Go ahead.

[Unknown Analyst]

I have a question about potential cooperation between yourselves and the Polish Oil and Gas Company in terms of geo-methane. Are you considering a closer cooperation?

[Unknown Executive]

We signed this together, cooperation agreement with the Polish Oil and Gas Company. The biggest question market -- mark is the ability to use this coal after you do cracking. There's no information or research from the world that this would not affect the underground rock masses. And so we haven't made any final or further steps as for -- as of now.

So anyone else? [ Pawel ], so everybody's looking at you. No more questions then? There is a question, I think, about Bzie. So Mr. Dyczko is prepared. I'm not sure who brought questions, but he wanted -- perhaps I can pose the questions to him because he wanted to speak.

[Unknown Analyst]

I have a question about investments. Can you say in 2019 what's the total CapEx? How much investment? Would it be 4x the CapEx you've seen in Q1?

[Unknown Executive]

At the previous conference, we said that it would be higher than last year. We talked about PLN 2 billion.

Any other questions? If not, I'd like to thank you very much. We'd like to thank you very much. So I think there's going to be -- I'm not sure if it's the Polish championships in chess or the world championships. So somebody asking -- so all the best for your children. And having in mind Children's Day, and I invite you to come and join us for the next results conference. Thank you very much. Bye-bye.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]