Metinvest acquires 25% in Pokrovske for USD 190 mln, says official release

Metinvest (METINV), Ukraine’s largest steelmaker,
acquired a 24.99% stake in a group of assets, including Pokrovske Coal,
Ukraine’s largest coking coal miner, for USD 190 mln, according to Metinvest’s
Aug. 16 release.

The assets, which also include the Svyato-Varvarynska
coal enrichment plant, produced 4.3 mmt of raw coking coal and 2.6 mmt of
coking coal concentrate in 2017, Metinvest reported, adding that the proven and
probable reserves (K-grade coking coal, which is similar to Platts’ Premium Low
Vol HCC) amounted to 81 mmt at the end of 2017.

Metinvest said that the deal improves self-sufficiency
in coking coal and strengthens the holding’s vertical integration.

Dmytro Khoroshun: It appears
that Metinvest owns 14.3% of Pokrovske Coal indirectlyvia a 24.99% stake in a company named Industrial Coal Holding (owns 57.3% in
Pokrovske Coal) and possibly another 10% directly as a result of the recent sale of 40.8% in Pokrovske Coal.
We think that the remaining 75% share of Pokrovske Coal and other assets
Metinvest referred to is owned by companies associated with Metinvest’s owners,
SCM and Smart.

The implied price of 100% of these former Donetsksteel
group coal assets, USD 760 mln, is in line with the data we reported
earlier.

While we agree with Metinvest that this deal benefits
the holding by securing coking coal supplies, we note that profits from
Pokrovske Coal will not be consolidated in Metinvest’s financial statements,
and therefore this deal in itself does not achieve vertical integration to the
fullest extent possible. On the other hand, these assets have about USD 1 bln of debt,
and not consolidating them keeps Metinvest’s credit metrics in better shape.

We think that the best outcome would be for the
owners of the other 75% share of Pokrovske Coal, and the related assets, to
negotiate with the creditors aiming to restructure – and partially write down –
the debt, similar to what Interpipe proposed to its creditors recently. A worse outcome would be for Metinvest having to
service and repay implicitly – via purchases of coking coal concentrate and
dividends to its owners – a large part of the full USD 1 bln of these assets’
debt.