DTEK secures 0.6 mmt in coal purchases in South Africa

Ukraine’s leading coal and power holding DTEK (DTEKUA) reported on April 13 it has ordered 0.6 mmt of anthracite coal in South Africa, with an option to extend the order to 1.0 mmt. The holding expects the first shipment of 75,000 tons of coal will arrive in June. Currently, two of DTEK’s three anthracite-fired power plants are not operational after the government imposed a trade blockade on occupied Donbas, which is the source of all anthracite in Ukraine. On the positive side, their lack of operation will enable these plants to accumulate enough anthracite for the winter season, the holding reported. Meanwhile, its five power plants designed to burn hard steam coal are operational and face no deficit. Their hard steam coal is mined outside the occupied territories of Ukraine.

DTEK’s eight power plants produced 37.1 TWh of electricity last year, of which 11.0 TWh (or 30%) was produced by the three anthracite-fired plants.

Alexander Paraschiy: We estimate DTEK’s three anthracite-fired power plants consumed about 5.3 mmt of coal in 2016 and 1.2 mmt of coal in 1Q17. Having lost contact with its mines located on the occupied part of Donbas, it is actively seeking to import anthracite from South Africa or Australia.

As of end-1Q17, anthracite stockpiles at DTEK’s power plants were just 0.34 mmt, while we estimate DTEK may need to burn about 1.5-2.0 mmt of anthracite in the coming 12 months. Therefore, the news on securing imports is positive, but in our view, the contracted amount won’t be enough to smoothly get through the next winter season. Therefore, we expect DTEK will seek to order an additional 0.5-1.0 mmt of anthracite abroad later this year.

The key problem for DTEK is that imported coal is about USD 50-60 per ton more expensive than its Donbas-mined anthracite. We expect the holdng will cover the higher costs with higher electricity rates. In particular, DTEK’s power plants (including those burning easily available hard steam coal) enjoyed an average electricity price of UAH 1,770/MWh (USD 66/MWh) in March 2017, which is 23% m/m and 71% yoy higher. And that’s without any imported coal. All in all, we remain optimistic about DTEK’s ability to generate enough cash flow to smoothly service its debt in 2017.