New bridge explosion cuts off Metinvest steelmakers from ore supplies

A bridge in the Zaporizhia region was blown up by unidentified terrorists on Jan. 20, cutting off the two largest steelmakers of Metinvest (METINV) – Azovstal (AZST UK) and Ilyich Steel (MMKI UK) – from its iron ore supplies, as it was the main delivery route. The explosion was timed to derail a cargo train that was passing over the bridge with a large iron ore shipment.

The explosion was the second sabotage incident in two months aimed at undermining the sustainability of Metinvest’s operations in Mariupol. In late December, a detonated bomb destroyed a bridge connecting the two factories with an industrial port on the Azov Sea. Metinvest completed building an alternative  bridge last week.

Roman Topolyuk: We believe pro-Russian terrorists are specifically targeting the assets of Metinvest, which have been contributing significantly to Ukraine’s exports (Azovstal and Ilyich Steel generated up to 5% of Ukraine’s export revenue in 2013).

Though the holding stated it will reconsruct the Zaporizhia bridge as soon as the investigation is finalized, which can be within a month, such sabotage elevates the risks to the short-term sustainability of Metinvest’s operations. Along with sliding global iron ore prices, the company’s deteriorating liquidity position can significantly worsen as Azovstal and Ilyich Steel were the only drivers of the holding’s EBITDA increase in 1H14. We reiterate our bearish view on the Eurobonds of Metinvest.