Metinvest acquires additional stake in Pokrovske Coal

Metinvest (METINV), Ukraine’s largest steel and iron ore
producer, increased the stake its top holding company Metinvest B.V. owns
(together with affiliated persons) in PrJSC Pokrovske Coal, Ukraine’s largest
coking coal producer, to 67.28%, according to a March 4 report by
Interfax-Ukraine that cited a Pokrovske Coal’s regulatory disclosure.

 

Pokrovske Coal’s disclosure said that Metinvest B.V.
increased its stake in Pokrovske Coal as a result of acquiring corporate rights
in Industrial Coal Holding LLC (ICH, Ukraine) on March 2.

 

In August 2018, Interfax-Ukraine reported that Metinvest B.V. owned 24.99% of ICH.

 

At end-2020, the stakes in Pokrovske Coal owned by
Metinvest B.V. and ICH amounted to 9.99% and 57.29%, respectively, according to
Pokrovske Coal’s filing with Ukrainian regulators.

 

Two additional stakes in Pokrovske Coal, each
amounting to 9.99%, were owned by Treimur Investments Limited (BVI) and Altana
Limited (BVI) at end-2020, according to Pokrovske Coal’s filing. At the end of
September 2020, an additional 9.99% stake in Pokrovske Coal was owned by
Misandyco Holdings Ltd (Cyprus).

 

In its 2020 financials released on Feb. 16, Metinvest
stated that at the year’s end it owned 24.77% of the so-called Pokrovske coal
business that comprises several assets including Pokrovske Coal. Metinvest also
stated in its 2020 financials that it planned to increase its stake in the
Pokrovske coal business by 25.23% to 50.01% within a year.

 

According to a March 5 Metinvest release to investors,
Metinvest has increased its effective interest in Pokrovske coal business to a
controlling stake as the result of the acquisition of an additional stake. The
two most significant assets of Pokrovske coal business, which produces mostly
K-grade coking coal, are Pokrovske Coal and Svyato-Varvarynska enrichment
plant. In 2020, Pokrovske business mined 6.2 mmt of raw coking coal and
produced 3.2 mmt of coking coal concentrate, the release said, adding that the
annual processing capacity of Svyato-Varvarynska amounts to about 8 mmt of raw
coal.

 

As a result of the Pokrovske coal business
acquisition, Metinvest expects to become fully self-sufficient in coking coal
for its hot metal production, the release said.

 

In 2019-20, Pokrovske coal business restructured a
significant part of its loans and borrowings. As at end-2020, the Pokrovske
coal business had external debt of USD 535 mln. This mainly consists of a USD
480 mln restructured debt facility maturing in 2030, according to the release.

 

According to a March 5 presentation from Metinvest’s
website, JORC reserves of Pokrovske coal business amounted to 151 mmt at
end-2019 (including 99 mmt proven and 52 mmt probable). Its resources amounted
to 248 mmt (208 measured and 40 mmt indicated). In 2020, the Pokrovske coal
business supplied Metinvest with 2.8 mmt of coking coal concentrate, the
presentation said. Pokrovske coal business’ revenue amounted to USD 385 mln in
2020 (2019: USD 506 mln), its EBITDA was USD 144 mln in 2020 (USD 259 mln), and
its CapEx was USD 121 mln in 2020 (USD 106 mln).

 

Dmytro Khoroshun: Clarity is
required on the crucial point of how PrJSC Donetsksteel, a company related to
the Pokrovske coal business, will service and repay its recently restructured
debt.

 

Namely, Donetsksteel is apparently excluded from the
assets comprising the Pokrovske coal business as defined by Metinvest. This is
seen from the total debt of these assets, USD 535 mln, being smaller than the
USD 835 mln amount Donetsksteel planned to agree on with its
creditors.

 

However, until recently, Donetsksteel derived its
income solely from enriching coal mined by
Pokrovske Coal.

 

Therefore, we are wondering whether there will be cash
outflows from Metinvest (which now consolidates the Pokrovske coal business)
that would allow Donetsksteel to pay its creditors.

 

Regarding other details, it is possible that the
increase of Metinvest’s stake in the Pokrovske coal business (as a result of
the increase of its stake in ICH) amounted to the 25.23% addition planned for
2021, in which case it should have paid to its co-investors about USD 188 mln
for the corporate rights, we estimate. It is also possible that this amount was
offset by USD 77 mln Metinvest paid in 2020
under its guarantee for the co-investors’ obligations, resulting in a net
payment of about USD 110 mln.

 

Metinvest should maintain its total and net debt at
around USD 3.8 bln and USD 3.5 bln, respectively, if it issues USD 0.5-0.7 bln in new bonds
in early 2021 and spends USD 0.4-0.5 bln on pre-paying its existing debt and
USD 0.4-0.5 bln on paying out dividends to its shareholders during 2021, we
estimate. Its ratio of net debt to last 12 month EBITDA (excluding joint
ventures) should remain below 1.7x, and possibly as low as around 1.2x, at
least in the next few quarters, and possibly longer if the high steel and iron
ore prices at the global markets persist.

 

We maintain our neutral view on METINV bonds.