Metinvest moves to consolidate minor Pokrovske Coal asset companies

The Antimonopoly Committee of Ukraine (AMCU) started in
August its consideration of granting permission to Metinvest B.V., the main
holding company of Ukraine’s largest steelmaker Metinvest (METINV), for the
consolidation of some companies comprising the so-called Pokrovske Coal (PC)
assets, the AMCU said in an Aug. 22 press release.

In detail, the AMCU is considering granting Metinvest
B.V. the right to consolidate directly more than 50% in Industrial Coal Holding LLC (ICH), which owns a
57.3% stake in private joint stock company (PrJSC) Pokrovske Coal (SHCHZ UK),
Ukraine’s largest miner of coking coal. In August 2018, it became known that Metinvest B.V. had recently acquired 24.99% in ICH.

The AMCU said it is also considering allowing
Metinvest to consolidate more 50% in three other minor companies that also
belong to Pokrovske Coal assets, adding that these stake consolidations are a
part of a transaction whose goal is to obtain control over the production and
sales of coking coal and mining equipment, as well as over other unspecified
activities. The AMCU is soliciting submissions regarding the implications on
the coking coal and coking coal concentrate markets until Sept. 22.

Recall, Metinvest purchased 24.99% in
Pokrovske Coal assets in July 2018 together with what the
holding said were its four co-investors.

Dmytro Khoroshun: Curiously,
this particular AMCU consideration, presumably initiated by Metinvest, does not
mention the three major companies (listed below) of Pokrovske Coal assets, and
is therefore a minor development, in our view. Conversely, it would be a very
opaque development if Metinvest is allowed to consolidate all Pokrovske Coal
assets, including the three major companies, on the basis of this AMCU
consideration.

In our opinion, among all Pokrovske Coal assets, major
company No. 1 is PrJSC Pokrovske Coal, which mines coal. Major company No. 2 is
Svyato-Varvarynska LLC, which, as of 2018, provides coal enrichment services
via a tolling scheme. Major company No. 3 is PrJSC Donetsksteel, which owes USD
1.25 bln to creditors, buys coal from PrJSC Pokrovske Coal, and enriches it via
the tolling scheme at Svyato-Varvarynska, earning the major part of Pokrovske
Coal assets’ consolidated profits.

As we described in our May report “Fine selection
between the elections”, we think that Metinvest will delay its consolidation of
the all Pokrovske Coal assets until 2024 in order to (1) focus on its CapEx
program, (2) be ready for opportunistic investments into European re-rolling
plants, and (3) comfortably refinance its USD 945 mln Eurobond due in 2023.

We maintain our bullish view on METINV bonds.