Metinvest EBITDA rebounds to USD 73 mln in January

EBITDA at Ukraine’s largest steelmaker Metinvest
(METINV) skyrocketed to USD 73 mln in January from negative USD 39 mln in
December, according to its monthly results published on Mar. 13. The holding’s
revenue gained 5.5% m/m to USD 821 mln.

 

EBITDA excluding that of joint ventures (JVs) jumped
to USD 66 mln in January from negative USD 41 mln in December.

 

Metinvest’s operating cash flow before working capital
changes jumped to USD 57 mln in January from negative USD 8 mln in December,
whereas cash flow from operations (before profit tax and interest) jumped 2.1x
m/m to USD 107 mln.

 

The holding’s cash outflow from investment activities
dropped 38.7% m/m to USD 73 mln. Metinvest’s outflow from financing activities
amounted to USD 10 mln and its end-of-month cash balance inched up 6.2% m/m to
USD 291 mln. Its gross debt slid USD 5 mln m/m to USD 3,027 mln.

 

Metinvest’s metallurgical segment EBITDA was USD 12
mln in January, rebounding from negative USD 85 mln in December, while its
mining segment EBITDA jumped 53.1% m/m to USD 75 mln.

 

In the yoy comparison, Metinvest’s revenue dropped
8.8% in January, while its EBITDA plunged 42.1%.

 

Iron and steel product prices showed mixed m/m
dynamics in January, gaining 2% for pig iron and slabs, but losing 4% for flat
products and 3% for long products. Iron ore concentrate price rose 8% m/m,
while pellet price jumped 20% m/m.

 

Dmytro Khoroshun: Finally, a
return to profitability at Metinvest, including at its metallurgical segment,
which is positive.

 

We continue to expect Metinvest’s EBITDA to remain at
least USD 40-50 mln per month in February and possibly in March. Furthermore,
the 10-20% rise in Ukraine FOB iron and steel prices during November-January
might be reflected in Metinvest’s February-April prices, which might boost its
EBITDA further to USD 60-90 mln per month during these months.

 

However, Ukraine’s FOB export prices for steel products
started to correct in mid-January. Although the price decrease so far
(mid-March) has been only mild, less than 5%, the steel markets worldwide might
well correct further because of the coronavirus situation. Therefore,
Metinvest’s profitability might suffer again in 2Q20.

 

It is important at this point to estimate whether
Metinvest remains within its 3x covenant for consolidated net leverage ratio in
the coming months. In these tests, the most important EBITDA indicator excludes
the EBITDA of joint ventures (JVs), as is stipulated in Metinvest’s incurrence
covenants under its Eurobonds and possibly is established in its maintenance
bank loan covenants.

 

In order to keep its consolidated net leverage ratio
below 3x by Mar. 31, assuming USD 2.74 bln of net debt (the same as
end-January), and excluding JVs’ EBITDA from the calculation, Metinvest needs
to earn USD 97 mln per month on average in February and March. Considering the
holding’s much lower profitability in recent months, we see a substantial risk
of Metinvest breaking its 3x covenant for its consolidated net leverage ratio
by the end of March.

 

A similar calculation for the consolidated net
leverage ratio test for June 30 (again, excluding JVs’ EBITDA) results in USD
111 mln average monthly EBITDA that Metinvest needs to earn in February-June in
order not to break its 3x covenant. Again, we see a substantial risk of a
breach unless iron ore and steel prices rise dramatically.

 

Nevertheless, according to Metinvest CEO’s statements during a Mar. 4 call
with investors, the holding is proactively monitoring its covenant compliance
with a 4-5 month horizon and will approach its creditors for amending its
maintenance covenants if necessary.

 

We maintain our negative view on METINV bonds.