Zaporizhstal shifts highway to prepare for converter shop construction

Zaporizhstal (ZPST UK), Ukraine’s fourth-largest iron
and steel plant in which a 49.9% stake is owned by Ukraine’s largest steelmaker
Metinvest (METINV), spent UAH 220 mln (USD 8.1 mln) into constructing a new 2.5
km highway, according to the plant’s July 22 press release. This highway
replaces an old one that needs to be shut down in order for Zaporizhstal to
construct a converter shop.

Metinvest’s CEO Yuriy Ryzhenkov attended the
ceremonial opening of the new highway and said that the highway is the road to
the new converter shop, according to the plant’s release.

Recall, in February 2018 Zaporizhstal’s CEO said in an interview that the
plant was in talks with European banks on financing a USD 1 bln three-year
project on replacing its open-hearth furnaces with an oxygen converter shop.

Dmytro Khoroshun: We are
wondering which part of the USD 1 bln financing for Zaporizhstal’s converter
shop Metinvest would have to come up with, either explicitly via a loan (or
possibly a guarantee) or implicitly via working capital. As we discussed earlier,
Zaporizhstal might not be able to fully finance the converter shop project
itself. However, Metinvest needs Zaporizhstal as a logistically favorable buyer
of its iron ore products. This is why we think that Metinvest might help
Zaporizhstal with implementing its capital investments.

Because steel prices plunged from the mid-2018 levels
(when Zaporizhstal likely commenced its highway project) and iron ore prices
surged in 1H19, Zaporizhstal’s profitability has recently collapsed: from the
yearly average of about USD 300 mln of EBITDA in 2016-2018 to a negative USD
-22 mln in 4M19. It does not look like Zaporizhstal will be able to pull off on
its own the securing of the financing for the converter shop project in the
near future.

We maintain our bullish view on METINV bonds.