Metinvest, SCM acquire stake in Pokrovske Coal

Ukraine’s largest steelmaker Metinvest (METINV) – together
with companies likely affiliated with its majority owner SCM – acquired a
controlling stake in Ukraine’s largest coking coal miner Pokrovske Coal (SHCHZ
UK), according to Pokrovske Coal’s filings. Since 2Q17, a 57.3% stake in
Pokrovske Coal, which previously belonged to Ukraine’s steel producer
Donetsksteel, has been owned by Ukraine’s Industrial Coal Holding LLC (ICH),
which – according to an Aug. 3 Interfax-Ukraine report – is owned by Metinvest
B.V. (24.99%) and four other companies, three of which (together 74.97% of ICH
ownership) control about 71% of Dniprovskyy Coke. Metinvest has been seeking
control over Dniprovskyy Coke, according to Interfax-Ukraine.

Another stake in Pokrovske Coal, 40.8%, belongs to
Fintest Trading Co Ltd. of Cyprus (Fintest). According to Pokrovske Coal’s
financial statements, Fintest, which is the top holding company of Donetsksteel
group, is the de facto controlling company of Pokrovske Coal as of end-2017.
Pokrovske Coal was in default on USD 15 mln of debt and was one of the
guarantors for several loans to Donetsksteel group (as of end-2017), including
a USD 701 mln PXF and USD 227 mln of other loans, the company reported in its
2017 filings. The loans to Donetsksteel group that Pokrovske Coal guarantees
are in default, and some of the creditors went to court in order to recover
portions of these loans, according to Pokrovske Coal.

In 2017, Pokrovske Coal’s revenue amounted to USD 346
mln and the company’s EBITDA was USD 120 mln, according to Concorde Capital’s
analysis of Pokrovske Coal’s filings. It mines K-grade coking coal. The
company’s production volume amounted to 2.16 mmt of run-of-mine coal in 1H18
(+10% yoy) and 4.35 mmt in 2017 (+1% yoy).

Dmytro Khoroshun: This
development carries both positive and negative risks to Metinvest. The positive risks are the
financial benefits – if Pokrovske Coal
is eventually consolidated – and secured coking
coal supplies, although Metinvest is the dominant coking coal buyer on
Ukraine’s market in any case. The negativerisks are the possibility of Donetsksteel group continuing to exercise de facto
control over Pokrovske Coal and the guarantees on Donetsksteel group loans.