Metinvest affiliate Pokrovske Coal to boost coal production 42% in 2019

Private joint stock company Pokrovske Coal plans to
boost its raw coking coal production 42% yoy to 5.63 mmt in 2019, according to
the company’s 2018 accounts published on Apr. 26. PrJSC Pokrovske Coal is a
part of Pokrovske Coal assets in which Ukraine’s largest steel producer,
Metinvest (METINV), acquired a 24.99% stake in 2018. Its
2018 coal production reached 3.98 mmt, a 9% yoy decline.

 

Pokrovske Coal’s 1Q19 raw coal output amounted to 1.03
mmt, a 8% yoy drop, according to Energy Ministry, as cited by Interfax-Ukraine.

 

PrJSC Pokrovske Coal’s revenue amounted to USD 267 mln
in 2018, a 23% yoy drop. Its average price of raw coal was USD 58.0/t, down 3%
yoy. EBITDA plunged 76% yoy to USD 29 mln, but net operating cash flow dropped
only 5% to USD 78 mln. Net loss amounted to USD 40 mln, compared with a net
profit of USD 76 mln in 2017. The 2018 CapEx was USD 66 mln, a 36% yoy plunge.

 

PrJSC Pokrovske Coal also reported that it was a
party, either as debtor or a guarantor, for the debts of PrJSC Donetsksteel,
another part of Pokrovske Coal assets, in five court cases in which it was
ordered to pay its creditors around USD 170 mln. However, PrJSC Pokrovske Coal
apparently did not pay these amounts in 2018, and did not form any reserves in
relation to the courts’ decisions.

 

Dmytro Khoroshun: The plunge
in EBITDA is not very worrying; some of it could be due to reclassification of
some expenses from CapEx to OpEx, which would explain the drop in CapEx. Most
importantly, PrJSC Pokrovske Coal is only a part of Pokrovske Coal assets, and
its finances do not reflect the substantial profits of the coal enrichment part
of the business.

 

For example, in 2017, PrJSC Pokrovske Coal’s EBITDA
amounted to USD 120 mln, or USD 28 per ton of raw coal it mined, or USD 48 per
ton of coal concentrate to be produced from its coal. However, PrJSC Donetsksteel,
which in 2017 enriched coal mined by PrJSC Pokrovske Coal and produced 2.57 mmt
of coal concentrate, earned an adjusted EBITDA of USD 179 mln, or USD 70 per
ton of concentrate. In other words, the total USD 118/t of concentrate EBITDA
of Pokrovske Coal assets in 2017 was split as USD 48/t at the mining stage
(PrJSC Pokrovske Coal) and USD 70/t at the enrichment stage.

 

In its 2018 financial statements, Metinvest mentions,
as its assumptions for its valuation of Pokrovske Coal assets, USD 191/t as the
2019 price of coal concentrate and 64% as EBITDA margin, which yields an EBITDA
of USD 122/t for 2019. Considering all the above, we remain confident in the
high profitability (USD 300-400 mln per year) of Pokrovske Coal assets as a
group (both mining and enrichment of coking coal).

 

We see PrJSC Pokrovske Coal’s plans to increase
production volumes 42% yoy in 2019 to 5.63 mmt of raw coal (equivalent of about
3.2 mmt of coal concentrate) as positive for Metinvest, its main customer and
partial owner. To accomplish that however, the company will have to boost
significantly its mining volumes in April-December, because in 1Q19 they lagged
by 8% yoy.

 

Regarding PrJSC Pokrovske Coal’s obligations as
debtor and guarantor, it’s possible that the total of USD 1 bln of Pokrovske
Coal assets’ debt will
be restructured, a possibility mentioned by Metinvest at its recent call with investors. Nevertheless,
our base case remains that this debt will eventually have to be repaid in full.