Metinvest might increase CapEx 20-30% in 2021

Metinvest (METINV), Ukraine’s largest steelmaker, might
increase its CapEx to USD 800-850 mln in 2021, or 20-30% more yoy, according to
Metinvest’s corporate finance and treasury director Oleksandr Lyubarev, who
spoke on the holding’s 2020 results during a call with investors on Feb 16.

 

The steel and iron ore markets look overheated right
now and the prices might fall during 2021, but the drop might be moderate,
according to Dmytro Nikolayenko, Metinvest’s sales director who also spoke on
the Feb. 16 call. The coronavirus vaccination campaigns around the world are a
reason for optimism regarding the markets, Nikolayenko said.

 

Metinvest might pay dividends to its shareholders with
cash left after the financing of its higher priorities, the foremost of which
are CapEx and debt service, according to Lyubarev. Metinvest’s cumulative
dividend payouts will be below USD 400 mln until the company publishes its 1H21
results in 3Q21, Lyubarev said. Metinvest also wants to maintain a minimum cash
balance of at least USD 200 mln, which might need to be higher under the
current market conditions of elevated prices.

 

Metinvest plans to increase its stake in the Pokrovske
coal business to 50.01% from the current 24.77% by the end of 2021, Lyubarev
said, adding that exceeding the 50% threshold will cause Metinvest to start
consolidating the assets comprising the Pokrovske coal business as
subsidiaries. The consolidation will add USD 500 mln of debt to Metinvest’s
balance sheet and increase its EBITDA by at least USD 120 mln per year when
coal prices are low (and potentially in excess of USD 200 mln per year when
coal prices are high). There is also a potential for further EBITDA increase if
the Pokrovske coal business boosts its production volumes to 4 mmt of
concentrate per year or more, Lyubarev said.

 

Metinvest might also set off the USD 77 mln 2020 payment
under a guarantee against its future payments for corporate rights in the
Pokrovske coal business, according to Lyubarev. Metinvest might purchase the
remaining 49.99% of the Pokrovske coal business in 2022.

 

Dmytro Khoroshun: Metinvest
might increase its dividend payments substantially in 2021, to several times
more than USD 100 mln in 2020, if the prices for its products remain high
throughout the year. This is because the expected yoy increase in cash outflows
(the CapEx increase of USD 150-200 mln and the payment for a 25.33% stake in
the Pokrovske coal business) might be more than offset by the increase in
operating cash inflows due to favorable global markets.

 

Importantly, Metinvest’s cash pile at the beginning of 2021,
USD 826 mln, is about USD 0.5-0.6 bln higher than its minimum cash requirements
and is another reason to expect an increase in dividend payouts in 2021.

 

We also remind the investors that the annual EBITDA of
the Pokrovske coal business might be closer to USD 100 mln than to USD 200 mln
even when coal prices are high. This is because PrJSC Donetsksteel, which might
not be among the assets of the Pokrovske coal business as defined by Metinvest,
reaps half or more of the profits by purchasing raw coal and enriching it via a
tolling scheme, we estimate.

 

Nevertheless, we agree with Metinvest representatives
that the Pokrovske coal business, even without Donetsksteel, might increase its
EBITDA if it continues growing its production volumes (2020: a 23% increase to 6.13 mmt
of raw coal, or about 3.5 mmt of coal concentrate).

 

In any case, more details about the Pokrovske coal
business, most importantly its actual contribution to EBITDA and its CapEx
requirements, are needed to understand the financial effects of the upcoming
consolidation of these assets by Metinvest.

 

We maintain our neutral view on METINV bonds.