Jastrzebska Spolka Weglowa SA

WSE:JSW

Earnings Call Transcript 2018-Q3

[Daniel Ozon, executive]

[Audio Gap] you very cordially to the JSW Group results conference recap. We want to present the results year-to-date for the first 9 months of the year as well as for Q3. We prepared a presentation, as usual. We'd like to go ahead and share with you the main figures for the first 9 months of the year, and then we'll give you some more data about the operations of our group. [Audio Gap] And so this is an increase of nearly 3.5% compared to the corresponding period of last year. The average coking coal price [Audio Gap] is down by 0.6%. It's around PLN 659. And the average coke price in this period of 9 months is PLN 1,085. Here we see that the ratio of coke prices to coal prices is a strong ratio. And so coke prices have moved up on average by more than 17%. And so we have an EBITDA result of PLN 2.65 billion. This result is down by a little less than 9% compared to the corresponding period of 2017. Our EBITDA margin is 36%, down by around 7% (sic) [ 7 percentage points ] compared to the corresponding period of 2017. Our net result for the first 9 months is PLN 1.44 billion, so we're down by around 19% compared to the first 9 months of the year. If we look at our CapEx. We'll address this a little bit later in the presentation, but we're a little over PLN 1 billion, PLN 1.03 billion. This represents strong growth compared to the corresponding period of last year. Now we'd like to go ahead and present our operating results.

[Tomasz Sledz, executive]

So welcome, ladies and gentlemen. So coal production is as follows. In the first nine months of 2018, we had 11.283 million tons, so we're up by 1.9% over last year's. And we had a little over 8 million tons of coking coal and a little over 3 million tons of steam coal. And so we had the decrease of 11.3%, which was we didn't start running a longwall, A3 on Zofiówka. Of course, we didn't start that in August because of what happened in May in the Zofiówka section of the mine, but it started a little bit later. So we have a 72% percentage of coking coal. If we look at our mining cash cost. We're at PLN 372, and it's up by 28% compared to the first 3 months of -- first 9 months of 2017. And so employee benefits, external services as well as methane drainage and costs of materials. And so these costs were up by some 30%, 40%. If we look at our coal inventory. At the end of September, we had 713,000 tons. And so it's 23.6% less than we had at the end of June, but it's up over what we saw in the end of the year. So if we look at our corridor works. We did 11.6% less than we did in the previous year. So we did 42,000 meters on our -- using our own staff, and other companies did 6,000. The main reason that we've not been able to do as much is because there's a lack of companies doing tunneling works. So external companies did some 14,000 meters, and this year, they've only been able to do a little less than 7,000. So in order to improve the situation, we're creating our own additional crews. We want to have 50 crews. This is something we've been working on this year. We're creating those crews. We're training them, and so they'll be up and running in 2019. We also have an efficiency program. We're extending the amount of time, working time, at the tunneling works, and so the number of meters can be a little bit lower. We have -- we also are purchasing PBSz. And we're also having some specialized equipment in order to improve with the roof-bolting system to improve, of course, the overall output. If we look at the production and coke inventories we have. So the production of coke compared to the similar period of 2017 is up by 3.4%. We produced 2.685 million tons of coke, with the utilization of our capacity at some 92.7%. And so we had 835,000 tons coke produced in Q3, so it's down 10% compared to Q2. This was caused by some of the planned renovation work. And we also had less coal produced and delivered by the Zofiówka section in this quarter, and I already talked about that. And so we have 326,000 tons of coke in our inventories at the end of the quarter. We had an average cash conversion cost of PLN 152.8. And so this is pretty much where we look -- what we look like. And that's it for me, and so we can go on to what the market environment looks like.

[Jolanta Gruszka, executive]

Traditionally, I'd like to go ahead and give information about the market. We will start looking at our customers. We can see that -- the first 3 quarters of this year, we can see that the global steel market is producing more by around 5% in the European Union. In the first 3 quarters of the year, compared to the corresponding period of last year [Audio Gap] we're up by a little less than 1.5%. And if we look at Q3 of this year on a stand-alone basis, compared to the previous quarter, we see stabilization in production of steel across the world. What we want to draw your attention to is that the steel production in EU is down. And we can see that -- the important markets for us of Austria and Poland. In Austria we have a decline in production of some 44%, and in Poland it's down by 8.5%. And above all, this is a result of previously planned renovations of blast furnaces. This was communicated earlier. So we had very low level of water in European rivers, and this had a negative impact on the level of production and the situation that various steel mills had in Q3. The next slide shows you a review of market trends for coal and coke over a longer period of time. To sum up: We can say that we have the TSI index for hard premium coal, and we're also showing the blast furnace coke index from the Chinese market. And so you can see the main factors, the main drivers of the coal market standing prices as well as price fluctuation across the market. And so if we look at Q3, we can see that price -- coal prices had fluctuation between $170, $206 for premium coke -- premium coking coal. We see smaller fluctuation amongst the coke prices on an FOB Chinese basis from [ $320 to $380 ] . What's something we can see if we look at the last 2 quarters, we see a certain amount of stabilization in terms of coal (sic) [ coke ] price stabilization. We don't see the same level of fluctuation or volatility as seen in previous periods. What else we think we should mention, in Q3, about Q3, the Chinese government, in July of this year, had announced a plan to protect the environment. This is a 3-year plan. This time around, it's called the blue sky plan. And so the market is waiting to hear a few more details about this plan, what area, where will this be implemented, what size of area and when we talk about the big blast furnace coke region and where they're producing that. And we have to remember that they are the biggest producer. And we're also looking at the limits for emissions of pollutants. Another plan that's being discussed when thinking about the Chinese market is the government's interest in having a greater integration between coking plants with the steel mills. And this probably means that there'll be higher utilization, higher efficiency; and that means they're going to probably want to source higher-quality coking coal and coke. And so if we look at the coal prices. We're showing you here the semi soft prices, which are the blue bars. And we're also showing you the hard premium prices, where the hard premium is shown in 2 different approaches. We have the medium -- or monthly average TSI premium hard. And we also show you this price utilizing the Nippon Steel method, where we have the average price for the quarters where we have basically a time shift of 1 quarter moving backwards, but this is a 3-month moving averaging.

[Unknown Attendee]

[So in the background, we're listening to somebody's conversation, in the background. It's not our conversation, but if you could try to correct that.]

[Jolanta Gruszka, executive]

And so if we look at the JSW sales in terms of all of the coking coal prices -- coking coal grades that's sold, we can see that the discount between our average price and the TSI index is grown by some 6%, but with respect to the Nippon Steel method, the discount has grown by 4%. So there are 2 different levels of discounting that we see are either 6% or 4%. On the next slide, we have an illustration of coke prices, and we can see this is based on deliveries to European ports. We have the blast furnace prices based on FOB in Chinese ports. And you can see the trends on the orange bar what the average price we've achieved. So this reflects on all of the grades of coke, and this is utilizing the coke plants of -- data. We can see some different trends on the European market. We can see that prices have subsided by 2.5%, while on the Chinese market they've moved up by some 5.5%. What we'd also like to show you, and this is something that we've discussed when looking at the first slide, we see that there's a return to a state of equilibrium between coke and coal prices. And if we look at the first 3 quarters of this year in comparison with the first 3 quarters of the previous year, we can see that there's substantial growth in the price of coke. And so it's much more rapid growth than we'd see -- have seen in coking coal prices, and that means that we have a safe ratio if we look at the comparison between coke prices and coking coal prices. And so that ratio is higher than 1.5%. And so we have the steam coal prices on the market. Here we're showing you the index which we're following on every single conference, which is the Polish index where -- for steam coal prices sold to professional producers. This is in PLN, and we have the monthly average prices and we have the quarterly prices. And we can say that it's grown by 2.4% in Q3 over Q2, while the average Q4 -- Q3 price the company has achieved is up by 10.5%. We've also decided to show to you the evolution of the steam coal market in a broader extent. And on the right side. We have a second index we have in the Polish market which is to the heating plants, both industrial heating plants as well as municipal heating plants. And we also show you the trends, the price trends, for -- in Western ports, and this is of pulverized coal. And so everything is with the common denominator of the U.S. dollar. And we've basically boiled this down to a common denominator of 6,000 kilograms of -- kilojoules (sic) [ kilocalorie ] per kilogram. And so we'll discuss this during the financial section of the presentation. We -- here you see the sales of coal produced in JSW Group. If we look at the first 3 quarters of this year compared to last year, we can say that we have a stable level of sales in Q3 of this year. The sales to external players was quite similar to what we saw in Q2, but if we look at internal buyers, we're down by some, a little less than 6% from Q2 to Q3 of this year. And this is the that we had the events in Zofiówka which led to lower production of coking coal and then lower production of coke. And we also had some planned renovations, overhauls amongst our customers; and that's why we focused on making deliveries to external customers. And because we had the internal situations, the external situations, so we reduced then the production of coke. And the prices that we've been able to achieve in Q3 amongst external buyers for steam coal, as I said, we had an increase of some 10.5%. If we look at the price we achieved on coking coal compared to the previous quarter, it's down by 5%. If we look at the first 3 quarters, we can say that the prices were quite similar as in the previous quarter. So we can say that steam coal prices were up by 19%, whereas coking coal prices were relatively flat. If we look at coke sales, we can see here that we have the 3 quarters year-on-year. We've been able to maintain the level of sales to external parties. In fact, that's the only thing that we do is we sell to external parties in terms of coke. So we have just a small decline quarter-on-quarter of roughly 1%, so if we look at Q3 sales. We were more or less in line with what we saw in Q2, but the first 3 quarters of this year, compared to the first 3 quarters of last year, we saw marked improvement in prices and whereas there was not much difference between Q3 and Q2 of this year. Thank you very much.

[Daniel Ozon, executive]

Okay, so ladies and gentlemen, if we go on to the investments in the JSW Group. And so in the first 3 quarters, we've informed you basically that, Q3 and Q4, we usually speed up our investments. The first couple of quarters is when we start doing the tenders, speed them up, make our selections of contractors. And now we have Q3... [Thank you for picking that up for me.] So if we look at Q3. We have an increase over Q2. We have 41% up in terms of CapEx. And we come in at PLN 1.03 billion. This is a major increase over the first 3 quarters of last year, when the company spent PLN 553.9 million on CapEx. Of course, we're investing in rebuilding our machinery. And of course, Mr. Sledz already mentioned what we'd invested in, and we'll continue to improve our coal preparation plants. And I'll talk about that in just a moment. If we look at JSW itself in the mining section, on an accrual basis in the first 3 quarters of the year -- well, in Q3 alone, we had PLN 394 million investments. And so this is up by nearly 50% quarter-on-quarter. In the first 3 quarters, we've spent PLN 870 million in the mining segment. And this is the segment where our investments have clearly sped up. The major investments are for building the level 1,080 meters in Zofiówka. And in Budryk we're nearly 85% advanced in the construction of level 1,290 meters underground. And we're also doing work on our coal preparation plant, and so we're at [ 95% ] and 78%. If we look at the coke segment of the business. Here you can say we have a decline of 20% in the first 3 quarters of the year compared to the first 3 quarters of last year. The good information is that we've announced 2 crucial strategic tenders to modernize coking battery number 4 in Dabrowa Górnicza. And the second tender is linked to the construction of a power unit in Radlin. And we've also been able to obtain financing from the national environmental protection fund to the tune of PLN 200 million for the coke oven battery number 4, and we have received the decisions to get financing of PLN 130 million also from the national environmental protection fund. And these are loans offering very attractive financial terms compared to commercial financing, and this is long-term financing. A couple words about our key investments. We have the power generation unit. This is a crucial element of our strategy execution to be independent in terms of electricity production. As you know, in our long-term strategy this is a key thing, especially in today's times, having in mind the coal -- the electricity prices that have already moved up. Energy prices have already moved; and certainly, under plans, could continue to grow, as you recall, our investments in the mining segment where we're using methane-driven engines. And also, we have this power generation unit in Radlin. These are 2 steam generators. And so we have -- these are 2 steam driven, 2 times 52 megawatts of thermal power. And then we have 1 turbine that has 28 and then a heating unit of 37 megawatts of thermal power. Then you, down below, have a graph that shows you how this is going to be distributed. And then in 2019, the investment should begin. And then 2020, we will have the peak of the investment period; and then we should complete it in 2021. If we look at the modernization of the coke oven battery number 4. In line with our strategy, we want to be able to maintain the production of coke at a stable level of 3.5 million tons. So coke oven battery number 4 is the first one to go. We're going to use the top charge system, hence we're going to be able to produce higher-quality coke utilizing the same input. So it's going to be the stamp charging methodology that we're going to lose (sic) [ use ], and we'll have -- be able to use better-quality inputs. And so we would have 610,000 tons of coke produced annually. And then we could go on to the construction of a new coke oven battery, number 3, in subsequent years. Now we can come on to the presentation of selected financials, financial highlights at the end of or concerning the first 3 quarters of the year. So I'll give the floor now to our CFO.

[Robert Ostrowski, executive]

Welcome, ladies and gentlemen. So in terms of the financial standing at the end of this period, I would say the data are as follows. First, our sales revenues in the group are PLN 7.286 billion. And compared to the previous year, we can say that our sales revenue is up by some 9%, whereas in Q3 had a negative growth rate compared to Q2 of 2.9%. So we had construction. So our revenues in Q3 were at PLN 2.35 billion. On the next slide, we'll show you the impact on our EBITDA and I'll tell you a little bit about the drivers there. If we look at EBITDA. You've had the opportunity to look at our financials. We have PLN 2.654 billion of EBITDA. A year ago, we had PLN 2.9 billion. We have a variety of one-offs this year and last year. And so if we look at the comparability, so we will have PLN 2.65 billion, as opposed to PLN 2.9 billion last year, as a result of the various one-offs. Well, that's net of the one-offs. And then we had the one-off payments paid to employees as a result of the financial situation, and so the frozen elements from 2016 were then released. So this is primarily the free coal allowance that was released, as well as the 14th salaries or the annual bonus. So this is something that we'd informed you of previously, and that was one of the main differences in terms of the one-offs. And so our net working capital at the end of September of this year was PLN 382 million, so we have an increase of 161% over the end of the year. Well, the -- well, according to the decision, we had already -- of the management board, we'd already put some money into the -- a closed-end investment fund. And so between the end of -- well, of -- the end of September and the end of December of last year, we had a decline, but that was a result of the investments we made into the closed-end investment fund. But that's a liquid investment fund, so we're able to utilize that fund, tap into it if we need it. So now a few words about the EBITDA drivers in Q3 compared to Q2. So in Q2, we had PLN 631 million EBITDA, and PLN 634 million in Q3. So we had some coking sales -- coking coal sales volume to external buyers down by 4.5%, and that gives an impact of PLN 33.5 million on EBITDA. We also saw a similar decline of average coking coal prices by 5%. That gives an impact of PLN 32.4 million. Then the coke sales volume was down by 1% -- sorry. The average coke sales price down by 0.4%, and the volume of coke was down by 1%. And so that was impacts of PLN 1.8 million on prices and PLN 7.9 million on coke sales volume. So we also saw that we had an impact, upward impact, of other revenue of PLN 32.6 million. We've also had some OpEx impacts of nearly PLN 53 million that bumped up our EBITDA. And so on an accounting basis, we had PLN 641 million EBITDA. We had some nonrecurring events as a result of the function of the Suszec Section, which was what's left over from Krupinski. And so net of nonrecurring events, we had EBITDA of 634 million -- PLN 634.9 million. If we look at the impact of operating segments on our EBITDA. So we can say that the coking -- the coal segment bumped up our EBITDA by PLN 12 million. The coke segment bumped it up by PLN 104 million. The other segment bumped it up by PLN 5 million. And so the EBITDA -- adjusted for consolidation, brought it down by PLN 112 million, and so the EBITDA all in was PLN 641 million. Then we had the nonrecurring events of PLN 6 million-plus. And so the EBITDA net of nonrecurring events was PLN 635 billion, you can say. So now a little bit of information, more detailed information, about the first 9 months of the year compared to last year, same corresponding period. So if -- we have an EBITDA of PLN 2.4 billion. It's down about 15%. Depreciation and amortization was lower by 10%. This is a result of the charges and allowances that we took at the end of 2017, but it's also an impact, a result of the high level of investments that we're doing. And this will have an impact on depreciation and amortization in subsequent periods. If we look at EBIT, in 2018, it was PLN 1.855 billion. It's down 16% compared to last year. If we look at the results on financing activity, it's minus PLN 59 million. Last year, it was PLN 17 million, in black, but this was because of FX changes. The result before tax was PLN 1.795 billion, and so it's down by 19% compared to the previous period. And if we look at income tax, it was PLN 353 million compared to PLN 432 billion (sic) [ PLN 432 million ] last year, so the tax was 18% down. The net result is PLN 1.4 billion compared to PLN 1.79 billion in the same period. So this is down by 19.5%. Now we have some information about the expenses by nature. In the first 9 months of the year, we had costs of PLN 6.045 billion compared to the same period in 2017. It was PLN 4.958 billion. And so if we look at the structure, the split, I would draw your attention at the beginning to employee benefits, labor costs. And this is a result of all of the actions that the management, along with the trade unions, did. So we had the higher wages in June, which we notified you of that. And we also released some other held-back payments and that were made this year. And then we also see the headcount in the group is up by 315 people. This is a result of what the CEO said. We can say that suppliers have problems finding employees. And since we have certain production targets, operating targets for our preparatory works, corridor works, we had to take efforts in order to have places to do our production in the future. And so we have higher headcount, so we also have secured the company. We saw that external players wanted to offer higher and higher prices. And so we wanted to defend ourselves against that, and we've created our own company. Where justified, we will start providing the services internally. And so we've also seen an increase in the costs of material and energy. The overall economy is suffering, I'm talking about the customers of electricity, because of energy prices moving up. And so in 2017, 1 megawatt hour cost us PLN 284. This year, it's 11 percentage points higher. And this is starting to have an impact on our cost split by nature. One of the things that we wanted to achieve in this strategy over the next 2 years is we want to be independent in terms of energy. We want to have various electricity and power generation machinery so we could be freed up of having to buy electricity from the open marketplace. So we also see higher costs because external -- because of what we're buying, plant and machinery. We also have external services. We see that the rates for those services are moving up amongst external companies, and that means that we're spending more here. Now a few slides about our financial ratios, primarily about profitability and liquidity. So our ROE and our return on assets is growing because we have net profits. And so our current liquidity is at 1.11, at the end of September of this year. Please remember that last year we had 1.85, but this was before we allocated money to our closed-end investment fund. The same is true in terms of quick liquidity or the quick ratio. We're at 0.94 at the end of the third quarter 2018, whereas we were at 1.63 at the end of September 2017. That was before we set the money into the closed-end investment fund. At the end of year, we were down at 0.85 after it happened. If we look at net financial debt. And so we work on this with our bondholders, creditors. At the end of September, we're at 0.69. The lower that is and the more negative this ratio is, the better. And so 0.62 on an adjusted basis. So our net financial debt is PLN 1.65 billion at the end of Q3 2018. A few more words about JSW Group's financial highlights and what's actually contributing to our working capital. If we look at our assets, we have more than PLN 14 billion. And if we adjust for this -- adjust this for our current liabilities of PLN 3.636 billion, and so we have liabilities under debt securities and bonds of PLN 646 billion; trade liabilities and other liabilities; loans and borrowings; and other current liabilities, we can say that our permanent capital is PLN 10.43 billion. And if we reduce from that our plant and machinery, noncurrent assets, we have net working capital of PLN 382 million, because we also had subtracted out other noncurrent assets. And then as a matter of presentation, not so much about the split of the balance sheet figures, assets and liabilities, but you can see that, since the end of 2017, quarter-on-quarter, the balance sheet value is growing in the group. And we can see the cash flow over the first 9 months of this year, and the funds we've generated at the end of this period at PLN 2.2 billion, whereas our operating cash flow was PLN 2.445 billion. We spent PLN 1.189 billion. This is a different figure from the CapEx we presented. This is the cash basis compared to the accrual basis. We're looking at some of the investments that came, that were started in Q4 of last year but were -- the money was spent in this year. And then we have financing cash flows of PLN 215 million. And so that means that the total cash flow impact -- is PLN 2.2 billion. And so this is -- of cash and cash equivalents at the end of the period. And with respect to the financial section of the presentation, that would be it.

[Daniel Ozon, executive]

So ladies and gentlemen, before we go on to questions, perhaps I would give a few words of commentary about several important processes where we give you some press releases or when we meet at various conferences. We've mentioned that there is the Zofiówka impact. And so this was parcel H. We had good, high-quality coking coal in parcel H. So we have 0.5 million tons of production lower. We believe that we'll have 15 million tons of production this year, and so the Zofiówka effect will continue to affect us next year. So in a few years, once we complete our talks and with the Higher Mining Authority when we're going to be able to return to that parcel H, our plans will assume that we're going to be able to increase the run rate by a few percentage points. Despite this accident, we have ambitions, ambitious production plans, but at the same time we have to maintain a sense of reality. We can see there's a strong demand for the coking coal and coke we produce. Everybody understands where we're located. And so we've -- when we have cyclones in Australia or strikes in Mozambique or weather problems in United States; if there's logistical problems weather related, especially in the winter when steam coal is transported first, there is a [ priority ] attached to that. But our coal is close in terms of geography and has a low level of sulfur, so it's highly regarded. And that's why we want to increase and develop our resource base. And at the same time, we want to continue increasing the sales volumes because there is demand for our products. The next point that I wanted to discuss with you. This is the acquisition of the shaft-building company. If I remember well, we plan to continue our discussions, extend them after December 4. We have to get the consent from our owner, majority owner. And then we have to get the consent at the shareholder meeting. There are a few other things that we still have to agree about it. We want to clean it up, drive down -- drink down -- drill down to the details. So this is a key element, as Mr. Sledz said, in terms of being able to make up for the undone corridor works by external companies. And you can see that this is a permanent problem, as you can see in the figures quarter-on-quarter. And so the crisis that took place in previous years essentially ruined, cleaned the market up of those companies that we're operating in the market previously. And so this company PBSz has unique skills of designing and building sinking shafts. We spend nearly PLN 1.5 billion on shaft-sinking works, and we can see that we have quite a bit of competencies and skills in the corridor works, and this is a driver of our future plans. So we want to have real capacities to utilize our own crews to do these works. We have 15 -- 50 crews consisting of 13 persons. This is some 600 people. And so we want to be able to utilize their skills as well as combine them with what PBSz has, and this should enable us to do those tens of kilometers of corridor works every year. And so this year, we have a 4.5 ratio, last year of -- 5, in terms of the amount of work we were doing and for [ tunneling ] works. We have to intensify that. So once again, I would say we want to extend our cooperation agreement. And once we can iron out all those details, then we'll submit the proposals to the antitrust authority. And so we think that, in Q1 of next year, we'll able to close that transaction. The next item we've informed you of are talks concerning Prairie Mining and its assets. As we told you, our preliminary audits of the Debiensko as well as Jan Karski were positive in terms of their engineering and financial and legal aspects. Right now we're engaged in dialogue with our majority shareholder in order to get the directional consent to continue work. In terms to do some valuations on that company, we need some additional financial advisers. We have to bring them onboard to do that work. Under the strategy of our growth strategy to enlarge those resource base, we want to continue those talks in order to acquire or obtain control over these assets. It's too early to say under what regime we would gain that control or acquisition once we agree upon that with our majority shareholder -- majority owner. And we'll be able to define. We've already said that we want -- that the concession that's of interest to us is Debiensko. And so once we obtain control over that asset, then up until the time when the shaft is sunk, we would be able to maintain production of a maximum of 0.5 million tons of net coal production per annum. And so this would give us the ability to fill-in the lacking production as a result of closing our access to parcel H in the Zofiówka mine. And so then we would take over that company that does the shaft sinking, and then we could think about building the new mine, the coal preparation plants. I'll say a few words about that a little bit later. And so at the most recent conferences and after that, we've talked about work to refinance our financial position. We've talked about parallel past that we're following and what we're considering. We were thinking about a bond issuance on the U.S. market and having a mind the -- our proceeds being denominated in dollars and euros. And we were looking at refinancing that debt through banks domiciled in Poland. After having talked with our majority owner, we decided to finalize our work. So most of the Polish banks have completed their credit committees. We're working on a documentation. So there's a consortium that would provide financing of roughly PLN 750 million to finance in several tranches, and this will be mid-term financing. And this will be working capital and as well as a tranche to take over PBSz. We have to coordinate this work along with the corporate consents to acquire PBSz, but we're preparing the documentation. But at present, we have selected the strategy to refinance on the Polish market. Additionally, we've received the initial decisions of the European Investment Bank's credit committee to finance for a period of 8 years roughly PLN 250 million to do investments that are pro environmental, to do some research work. And so this is good news for us and because coking coal is on the strategic assets, strategic raw materials. And so this was important also to the European Investment Bank. And so it's more and more difficult to finance, but [ never so ] we've been able to get that PLN financing amongst Polish banks. So we also have an international bank involved in the consortium. And something else that we've mentioned, as we've discussed, the coking investments, PLN 200 million from the national environmental protection fund for coke oven battery number 4, and also for the Radlin power plant. And we also are talking about financing investments for a longer period of time. So the company is in a highly cyclical industry, so we want to build a cash buffer. And we've taken the first step. As you can see, we want to create a second investment fund, closed-end investment fund, for investments because the first one is more for the purposes of maintaining liquidity for rainy days, the next fund where we would inject PLN 300 million. And we want to get approval from the shareholder meeting for PLN 1 billion, and then we would get the -- make the additional payments into that fund without having to obtain additional corporate consents. So there are a couple other things that I wanted to talk about. Having in mind the end of this year, I mentioned at the previous results conference we would like to go back to paying dividends. And I want to confirm that, as a management team, it's too early to say what amount of money we would pay in dividends, but we would prepare a dividend payment for 2018. So we want to revisit -- we want to come back to our shareholders. As always, we want to be able to have balanced relations with all of our shareholders, stakeholders. So after the achieving all these results, we've been able to pay back the money to the employees. We seem to have a balanced relationship with the trade unions. So we've revisited talks with the bank debt market. And we're closing off that financing I've talked about, so we would also like to speak with the other stakeholder group. That is to say the shareholders. We'd like to be able to pay them a dividend again, and we're going to make recommendations of that sort. And a few last words from my side. We're working with several major partners of a technological nature, when we think about acquisitions and enlarging our resource base and bumping up our run rates. We're working with Australians. And so several times, we've been able to look at new technology for coal preparation plants and so looking at hydrocyclones. And this is different technology from the one that we use or the Polish mining sector uses. And there are some new -- well, there are certain solutions used in the Polish mining sector, but they're using different ones. We want to utilize and test whether or not their technology would work. Utilizing our coal grades and having in mind the overall technology we use, we're working with several different entities from China in terms of co-operating to -- tunnel shafts and build sink shafts. We've been there. We see -- have seen that. And we see some accomplishments that they've been able to make compared to the working system used in Europe. And this is something that pleases us. And giving consideration to the possible enlargement of the resource base and the sinking of shafts, we'll inform you of spinning off this Bzie Deminda (sic) [ Bzie Debina ] west. And we need, of course, PBSz in order to do the shaft sinking. And there's [ Zikinden ], a Chinese leader, built 400 shafts. PBSz [indiscernible], they've done several shafts over the course of a decade. So we want to use, i.e. tap into, the experience that's available on the marketplace. And if we talk about relations with the municipalities, are very important. Without permits we obtain from the local governments, it would not be possible to continue to fill-in -- what we have to have in mind, that we have -- when we extract 15 million tons of coal, we have also attracted 15 million tons of rock mass. And so we have to be able to put that somewhere, and so that's why we have to pursue and improve the dialogue we have with the local authorities in order to be able to generate the highest possible amount of benefit for all of the parties involved. And the last thing. We're thinking about the COP climate conference to take place in Katowice. And so there are a few areas that we want to show to the participants. We are talking a lot about the investments we're doing in the protection of the environment through methane engines. We're also testing and talking with partners from Japan and China in order to separate hydrogen from coking gas. There is roughly 50% of hydrogen, and so if you could purify that and bring it up to, say, 90%, where we could use it for fiber and for hydrogen cells, that's our goal. And if we're successful in doing that, if we could master that technologically, we could see that installation. We could think about having buses, coaches that will be fired by hydrogen. We're looking at this optimistically. And so at the conference called COP, we'd like to present that to you and in conjunction with several technological partners. That would be it in terms of the information from our side, and now we can go on perhaps to the Q&A session. I see that Pawel is smiling. I understand that there might be some questions out there.

[Pawel Puchalski, analyst]

Yes, Pawel Puchalski, Santander. I wanted to drill down. You said around 15 million tons is what you plan to have as a run rate this year, and you want to have several percentage point increase next year compared to 2018. I've heard about these crews working on the longwalls. And you need to do some additional work. Let me ask you, how many -- how much work do you need to do underground on these road galleries, how many kilometers in order to say that you can do 16 million (sic) [ 15 million ] tons of production? That's your plan, and your plan goes much farther than just next year.

[Daniel Ozon, executive]

So we -- 77 -- 78 kilometers. That's at a ratio of 5 meters per 1,000 tons. If we were to do that, then we would be able to achieve the 16 million tons per annum. And so if you want to do a run rate above that, you have to have an higher ratio of meters per 1,000 tons. And so we want to be able to produce that level. We've intensified our work on Saturdays and Sundays, where it's possible, in order to achieve that 15 million target -- 15 million ton target. It's important to understand where that's achievable, in which mines, in order to make up for that coal deficit. We -- I mentioned that we have the parcel H which we've lost, a high-quality coal. And so we need to be able to deliver and achieve our -- perform our contracts of coal supply for high-quality coking coal. So there's big demand. There's no problem to sell the quantities we produce, but the most important thing, of course, is to deliver coking coal.

[Pawel Puchalski, analyst]

So the shortage of the Zofiówka, which will continue to hurt you for the upcoming months into 2019, that means that the coking coal, to the total percentage of coal you produce, you're going to have a 70% ratio.

[Unknown Executive]

What we're trying to do -- it's about 70%. We're trying to catch up for the loss, the shortage we have from parcel H. We know this is not a matter of just pressing a button at a production line to do -- to achieve that goal. We have to be able to open up those parcels, those longwalls. We know that we're going to be able to do that over a few quarters. And so the mine -- leadership in the various mines have received these tasks. That's what we're trying to achieve.

[Pawel Puchalski, analyst]

One more question. You mentioned that the first fund, closed-end investment fund, is the liquidity fund. The next one is an investment fund. I thought both of them were investment funds forever. And my question is, can you imagine a situation in which, next year, you would use money from that first fund, closed-end investment fund?

[Unknown Executive]

I can tell you it this way. The first fund, well, we set it up in order to stabilize the liquidity in downturns. And the second one is only for investment purposes. Today, we don't anticipate that -- next year, that we would make any drawdowns from that first fund.

[Robert Maj, analyst]

Robert Maj from IPOPEMA. I wanted to ask about the volumes. You said, after consultation with the mining authority, it might take you a few years to reopen parcel H. Having in mind what you had in the strategy of producing 18 million tons in 2030, should we modify that? Or is it too early to talk about that?

[Unknown Executive]

It's too early. We continue to discuss and work with the Higher Mining Authority. And to respond to the previous question posed by Pawel to what extent we can move mining upward from one mine to another to fill in the gap from -- of parcel H at Zofiówka mine, it is premature, as I said, to make a decision to adjust the strategy. What we're trying to do is to grow production run rate gradually, steadily.

[Robert Maj, analyst]

Let me have -- talk about your costs in energy for next year. You said that costs are on the rise. Is this cost going to be 20%, 30%, 50%? I would assume that this year it's around PLN 300 million in total.

[Unknown Executive]

Well, PLN 300-plus million. We'll -- for the costs of energy. We're going to see what's going to happen.

[Unknown Executive]

So the results of investments in our own resources should start to produce some impact. If we look at the investments that are shorter term, so building methane in -- engines, we don't do any type of hedging on energy prices. We're a price taker of electricity prices, but by the end of the next year, we should start to feel the benefits of having our own methane-generation units in place.

[Robert Maj, analyst]

So you had the mining cash costs at PLN 407 million for Q3. Is it -- this is the new norm, new standard, to be above PLN 400 million.

[Unknown Executive]

So ladies and gentlemen, if we look at MCC, mining cash cost, in subsequent periods, we can't give any specific information because we don't produce and publish forecasts. So this is something that's happening since June, so we can say that it's fully impacted Q3, what happened in first half of the year. And so we don't see in the future that these type of payments to employees would be a recurring thing because we basically discharged their duties from previous years, but if we look at energy, other increases in material costs or other services costs, these were based on generally available data. Everybody can make his or her own assessments. We can't say it's going to grow or at what pace it's going to grow.

[Unknown Executive]

So if we look at steel goods, we think that steel prices have stabilized to some extent. Prices of services grew. The deliveries of materials grew in terms of their pricing. And so if we look at those trends in the steel portion, a large amount of these costs are related to steel structures for safety [Audio Gap] And we think that having thicker margins, fatter margins is -- are enabling -- is enabling these companies to make up for the lean years they've had in the past. We don't see further price increase. So the PLN 400 that you mentioned takes into consideration, of course, the one-off payment that was made to the employees. Just for clarity, for sake of clarity.

[Unknown Attendee]

I'm from Bloomberg news. My question is about Prairie Mining [Audio Gap] those assets. I wanted to ask you a follow-up question. When do you think you expect to make a final decision or to uphold the previous date? And what are the major obstacles you've seen? What has to be done for you to receive the consent from the owner to make that purchase? And could you say when and how this will be financed, what sort of form?

[Unknown Executive]

Okay. Let me say a few words of -- there's a certain amount of response where we didn't give that. We didn't say purchase. We said acquisition of control. There are a variety of forms for acquiring control. I don't want to make the impression that this is going to be a purchase. So the second thing: If we look at the pace of talks, we could say the end of Q1 next year. We're missing the valuations, the appraisals, if you will. And then looking at the commercial parameters for the transaction. Another thing that we're considering is cooperation with Bogdanka. It's difficult right now to say, when talking about the Jan Karski asset, which is south of Bogdanka. And we've always said that we're interested in coking coal. And so the deepest level, it's [ 391 ], is coking coal. And the other ones are steam coal. We want to increase the percentage of coking coal. Then we have Bogdanka versus Jan Karski, and then we have Knurów-Szczyglowice versus Debiensko. So we still have to do some commercial work on top of the technological work.

[Unknown Attendee]

The second follow-up question I have is about the funds you hold. Could you imagine a situation that you would make any type of investments in the Polish power sector using these funds at present?

[Unknown Executive]

No. So only one of the funds would not be used, but one of the funds could be used. So if we think about the investment fund, it could be utilized if there is some sort of price projection, volume projection. So we'll have positive cash flow. We'll generate a positive cash flow. That's our -- if we look at the capitalization of Prairie Mining. So acquiring control is something we could finance with our own cash we hold. And theoretically, for that purpose, we could utilize the second closed-end investment fund or -- where we have cash and cash equivalents in our balance sheet.

[Unknown Attendee]

[indiscernible] from [indiscernible]. I wanted to ask about the deposit at Debiensko. You didn't mention anything about the concession. Because we know that Prairie is trying to change the concession. They've not been able to do that. What sort of threats do you see?

[Unknown Executive]

We did a profound analysis with our legal advisers of all of the concession documentation for Debiensko and Jan Karski. We see, after we've received -- or once we receive the consents to acquire those assets, we would see a path to rectify all of the shortcomings, I would say, linked to the concessions and [ instrument approvals ]. We've analyzed that. We're aware, but we know how to solve that problem.

[Unknown Attendee]

One more question about the second fund, what you've called the investment fund, a nonliquidity fund. What sort of assets would it invest in? It might be difficult to extract cash if you need it. Or I mean illiquid assets...

[Unknown Executive]

They're going to be liquid assets. So when we created the first one, we had 2 sub funds. We have criteria in terms of what type of assets we would invest in. This is money market and debt instruments with minimum [ rating grade ]. This is we want to have a rate of return that's higher than what the company is able to generate when it invests in deposits. The next criterion is liquidity. We also agreed that there has to be a minimum percentage of the assets, within 3 months, we have to be able to liquefy and be able to utilize it for the company's needs. And the rest of the assets have to be achievable within 6 months. I'm giving these as an example. And so we have a moving projection for 12 months moving forward, and they may correlate with those conditions in terms of when we can get the money back from the fund manager to make sure that we can use those funds. [ When we're saying the investment funds ], that's the purpose of using the funds. It's not a matter of having long-term investments. Liquidity is the key thing, so if we need to use the funds, we need to be able to extract the money within 3 to 6 months. We want to invest in equity. I said it's debt instruments and money market instruments.

[Unknown Attendee]

I don't understand the difference between the first fund and the second front.

[Unknown Executive]

Let me add a couple words. The PLN 1.5 billion we've invested in the first closed-end investment, we have 2 portfolios. One is a pure liquidity, has a very short period to liquefy it, the assets. The second one is liquidity and investment. It has a slightly longer period. It's all debt instruments. Everything is all debt instruments. The investment policy forbids purchase of equity of any type. And there's this cap on if reinvestment. And on top of that, the instruments in our market have to have an investment-grade rating. These are the things that the TFI, the fund management company, has to fulfill. When we say it's an investment fund, that doesn't mean that we're going to use the funds in a sub portfolio in equities or anything of the sort. We're just saying that the money from the sub portfolio can't be utilized for investment purposes within the JSW Group. So to do the investments that are of strategic importance to the group. I think it might be worthwhile to mention we have an external source of funding [ FRP ] for the work on our coal preparation. We have some initial releases. We -- it's relatively costly. We want to refinance that. And it's something that we intend to do, so in Q1, in order to be able to exit that financing arrangement.

[Unknown Attendee]

One more question in terms of this shaft mining company PBSz. This is an epic drama going on for several months. Can you tell us one key reason why you've not been able to buy this company for nearly 6 months? The price has been agreed. Everything is completed. PBSz is not yet a member of the group. Why? That's my first question. The second thing is could you give me information. What's the difference between the prices -- the value of the salaries of PBSz and JSW?

[Unknown Executive]

So it's a matter of achieving. The main reason is to get the approval of the majority owner for the price, so PLN 204 million, PLN 210 million -- or PLN 205 million is only an [ inventation ] to -- and negotiate. That's the price that the management board of JSW has agreed with the seller. And after the analysis we've done with several advisers about valuation, and we used those valuations during the negotiation, that's the price we negotiated. And now the majority owner is doing its own analysis with its own advisers, and they've asked -- advice -- asked for additional time. And that's why we [indiscernible]. So the owner of our company of the -- majority owner of our company. Of course, there are some differences between salaries of the 2 companies. So we have a higher level of salaries than the one -- than the average level of the salaries.

[Unknown Attendee]

And the shaft construction company, could you say by how much more...

[Unknown Executive]

I think it's tens of percentage points -- it's higher than 10%. Let me put it that way.

[Unknown Attendee]

How many employees does PBSz have?

[Unknown Executive]

It's a little over 1,000.

[Unknown Executive]

Any other questions? I think there's one from IPOPEMA.

[Robert Maj, analyst]

I wanted to ask about gasification of coal. Is there anything else we could learn?

[Unknown Executive]

I understand you're thinking about our talks with Sasol. Sasol is a major supplier of technology for gasification of coal. Our daughter company JSW Innovation is looking at the opportunities to tap into that technology, looking at Lublin coal because the parameters there are more favorable. If you think about coal gasification, the work is beginning, so I hope, in 3 months, we're going to be able to say more. If we look at -- the income from the capacity market will be delivered [indiscernible] from Zofiówka.

[Robert Maj, analyst]

Will you have any preferential prices on energy? Or...

[Unknown Executive]

We'll have market prices there. Any other questions, ladies and gentlemen?

[Unknown Executive]

So ladies and gentlemen, I don't see any more questions. We'll have an opportunity to talk face to face after the meeting. So since we're here today. Next week, we have the miners' festival and holiday. On behalf of JSW, we wanted to pass on our best wishes because of the St. Barbara's miner festival. So thank you once again for your attendance, ladies and gentlemen. Bye-bye.