DTEK coal mining improves 9% in 2016

Ukraine’s leading coal and utility holding DTEK Energy (DTEKUA) mined 29.21 mmt of coal in 2016 (+9.3% yoy), Concorde Capital calculated based on sector-wide data reported by Interfax-Ukraine. The growth was fueled by a 77% yoy surge in anthracite coal mining in occupied Donbas (to 8.03 mmt). Its mining of hard steam coal decreased 4.5% yoy. The total official production of steam coal in Ukraine increased 5.0% yoy to 32.50 mmt in 2016, with DTEK’s market share swelling to 90% from 86% a year ago.

In December alone, DTEK Energy mined 2.92 mmt coal in Ukraine, a 32% yoy rise (and flat m/m) with boosted volumes in both anthracite (+124% yoy) and hard steam coal (+11% yoy).

Alexander Paraschiy: The holding’s annual mining results were not surprising as they were in line with its plan disclosed in December. DTEK was able to achieve such an improvement due to increased demand for electricity produced by its thermal power plants in 2H16, as well as relative stability in the Donbas war zone, which enabled it to smoothly deliver anthracite across the front lines. We continue to expect DTEK will report its adjusted EBITDA at over USD 550 mln for 2016, or 3x higher yoy.

In 2017, we expect DTEK’s fundamentals will weaken, with both coal and power generation volumes decreasing yoy and inflated production costs outpacing growth in electricity rates (which are planned by the power sector regulator to climb by only 5% yoy). Nevertheless, we estimate the holding’s annual free cash flow will be enough to smoothly service its debt obligations in 2017. We remain cautiously optimistic about DTEKUA Eurobonds.