Metinvest managed its markets successfully in 1H18, MD&A suggests

Metinvest (METINV), Ukraine’s largest steelmaker, published
a press release on Sept. 24 discussing its 1H18 financial results, providing
further details in addition to the financial statements it released
on Sept. 14. A significant contributor to the
59% yoy EBITDA growth to USD 1.335 bln in 1H18 was a USD 184 mln increase due
to resales, Metinvest said.

The volume of metallurgical segment sales in Ukraine
jumped 86% yoy to 2.06 mmt due to recovering demand as Ukraine’s economy has
grown for ten quarters in a row, according to Metinvest. The volume of
metallurgical segment sales to Europe rose 22% yoy to 2.71 mmt. Sales to the
MENA region jumped 72% yoy to 2.2 mmt as Metinvest redirected its HRC sales
from Europe to MENA. The volume of metallurgical segment sales to North America
grew 84% yoy to 949 kt, primarily due to rising pig iron sales, Metinvest said.

The volume of mining segment sales to Europe jumped
40% yoy to 3.93 mmt while volume sold to Southeast Asia, including China,
plunged 64% yoy to 978 kt, Metinvest reported.

In relation to operating cash outflow due to working
capital, which amounted to USD 356 mln, the company noted that net working
capital as percentage of yearly revenue was unchanged during 1H18 at 18%.

Dmytro Khoroshun: It is
positive that Metinvest is dynamically managing its sales in order to capture
higher netback prices (redirection of iron ore products from China to Europe,
higher steel sales in Ukraine), to counter rising trade barriers (redirection of steel sales from Europe
to MENA) and even to benefit from some aspects of trade barriers (higher pig
iron sales to North America, where demand rose due to U.S. Section 232 steel import restrictions).

The substantial increase in EBITDA due to resales, USD
184 mln, is likely in large part due to resales of Dniprovskyy Steel billets
and long products that started in August 2017. Recall,
with these resales Metinvest aims to collect at least USD 660 mln that
Dniprovskyy Steel owes Metinvest. Assuming
Metinvest collected USD 184 mln via resales in 1H18, such contributions to
EBITDA should continue until the end of 2019, provided steel prices do not
plunge.

We calculate that Metinvest might invest an additional
USD 0.2-0.3 bln into working capital in 2H18 in order to keep the 18%
NWC/revenue ratio as its yearly revenue grows from USD 11.2 bln at the end of
1H18 to about USD 12.5 bln by the end of 2018.