Metinvest, co-investors assemble group of raw material assets

Dniprovskyy Steel, whose long steel products are
resold by Ukraine’s largest steel maker Metinvest (METINV), sold its three
blast furnaces to Dniprovskyy Coke, a Ukrainian coke producer, according to a
court ruling on March 22 and published on March 25.

 

The court hearing in the Dnipro regional economic
court was initiated earlier this year by Dniprovskyy Steel itself and protested
the validity of the sale, one of the arguments being that the blast furnaces
are immovable assets and therefore should have been sold via a special
procedure. However, the court rejected the argument and found the blast
furnaces should be viewed as equipment and therefore as movable assets.

 

The sale and purchase agreement was signed on May 31,
2018, and the ownership rights for the three blast furnaces were transferred to
Dniprovskyy Coke after it had paid the full amount of UAH 401 mln (USD 14.8
mln) on Feb. 15, 2019.

 

According to Dniprovskyy Steel’s annual reports, the
three blast furnaces have an annual hot iron production capacity of about 3 mmt
(2018 production: 2.46 mmt). The company is controlled by Industrial Union of
Donbas, a Ukrainian steel holding.

 

Dniprovskyy Coke’s annual coke production capacity
amounts to about 0.7 mmt (2018 production: 619 kt). According to press reports,
the four offshore companies that have owned 23.6% of Dniprovskyy Coke each
since the end of 2013 are affiliated with the owners of Metinvest, namely, with
the SCM and Smart groups. According to Concorde Capital’s analysis, three of
these companies – Altana Ltd (BVI), Misandyco Holdings Ltd (Cyprus), and
Mastinto Trading Ltd (Cyprus) – own a total of about 49% of Pokrovske Coal
assets (2018 production volume about 2.6 mmt of coal concentrate). Recall, Metinvest purchased 24.99% in Pokrovske Coal assets in July
2018 together with what the holding said were its four
co-investors.

 

Recall, Metinvest has recently reported that in January 2019, it acquired 23.7% in Yuzhcoke,
a Ukrainian coke producer, whose annual coke capacity was reported to be about
1.5 mmt (2018 production: 590 kt).

 

Dmytro Khoroshun: It looks
like Metinvest and its co-investors are forming a group of assets that produce
raw materials. This coal-coke-iron group of assets comprise Pokrovske Coal
assets (coking coal mining and coking coal concentrate production), Dniprovskyy
Coke (coke and hot iron), and possibly Yuzhcoke (coke).

 

The coal-coke-iron group of assets is quite
profitable, and will benefit Metinvest substantially if and when the holding
acquires control and starts consolidating it. Namely, we estimate that coal
assets’ EBITDA should be at least USD 260 mln per year (USD 100/t of coal
concentrate, 2.6 mmt per year) and coke assets’ EBITDA should amount to USD 72
mln per year (USD 60/t of coke, 1.2 mmt per year), for a total EBITDA of USD
332 mln per year.

 

Should coal concentrate and coke production volume be
increased to 3.5 mmt and 2.0 mmt per year, respectively, the total coal+coke
assets’ EBITDA will amount to USD 470 mln per year. The EBITDA of iron assets
(the three blast furnaces) is more difficult to estimate because it will depend
heavily on dealings with Dniprovskyy Steel (sourcing all services and
materials, including pulverized coal, as well as sales of hot iron).

 

Nevertheless, under the current ownership structure
(Metinvest owns 25% in Pokrovske Coal assets and 23.7% in Yuzhcoke), Metinvest
will benefit mostly indirectly. Namely, these assets should provide stable
demand for Metinvest’s iron ore materials (about 4-4.5 mmt per year) and
possibly coke (several hundred kt per year produced at Avdiyivka Coke, if
production at Dniprovskyy Coke and Yuzhcoke is insufficient). An important
caveat is that Metinvest will benefit only if its sales of iron ore and coke to
the coal-coke-iron assets are performed at market prices, which should be
higher than, for example, in the alternative case of exporting iron ore to the
more-distant markets.

 

Regarding Metinvest’s co-investors, the substantial
profitability of the coal-coke-iron assets should allow them to comfortably
repay the USD 570 mln they owe (and Metinvest guarantees) for their 75.01% of
corporate rights in Pokrovske Coal assets.

 

We think that the initiation of the court case by
Dniprovskyy Steel itself, protesting its own action, might be a tactic of going
swiftly through the courts, securing positive decisions, and making later
trials more difficult.

 

We are keeping our neutral view on METINV Eurobonds.