Pokrovske Coal EBITDA plunged 49% in 2020

EBITDA at private joint stock company Pokrovske Coal
plunged 49% yoy to USD 61.4 mln in 2020 according to the miner’s financial
report published on April 30.

 

Pokrovske sold 6.16 mmt of raw coking coal in 2020, a
23% yoy increase, at an average price of USD 42.4/t, a 34% yoy drop. Its
revenue lost 16% yoy to USD 307 mln in 2020. Pokrovske’s net operating cash
flow amounted to USD 111 mln in 2020 (+19% yoy) and its CapEx was USD 115 mln
in 2020 (+23%), with the free cash outflow amounting to USD 3 mln in 2020 (an
inflow of USD 0.1 mln in 2019).

 

At end-2020 Pokrovske had USD 500 mln of long-term
bank debt (from zero a year ago).

 

Recall, in March Metinvest disclosed that it had
increased its effective interest in the so-called Pokrovske coal business,
which includes PrJSC Pokrovske Coal, to a controlling stake.
The only other significant asset of Pokrovske coal business is
Svyato-Varvarynska Enrichment Plant LLC, in which PrJSC Pokrovske Coal owns
55%.

 

In January, Pokrovske confirmed that it took on USD 500 mln of debt
as a result of debt restructuring by PrJSC Donetsksteel, a company which is not
a part of Pokrovske coal business, but for the debts of which Pokrovske was a
guarantor.

 

EBITDA at Donetsksteel plunged 46% yoy to USD 78.2 mln
in 2020 according to the company’s financial report published on April 30. It
sold 3.18 mmt of coking coal concentrate in 2020 (+12% yoy) at an average price
of USD 118/t (-32%). Its revenue dropped 24% yoy to USD 377 mln in 2020.
Donetsksteel’s net operating cash flow was USD 264 mln in 2020 (+22%) while its
CapEx amounted to USD 0.9 mln in 2020 (+58%), with free cash flow amounting to
USD 263 mln in 2020 (+22%).

 

At end-2020, Donetsksteel’s obligations included USD 612 mln to Itineris Holdings,
USD 253 mln to Pokrovske, and USD 294 mln of obligations under debt transfer
agreements.

 

The USD 253 mln of Donetsksteel’s obligations to
Pokrovske was a result of the restructuring of Donetsksteel’s debt. Within the
restructuring, Donetsksteel agreed to reimburse in full
the USD 500 mln that Pokrovske as a guarantor agreed to pay to Donetsksteel’s
creditors. However, in late April, the AGMs of both Pokrovske and Donetsksteel
agreed to release Donetsksteel from its obligation to pay USD 247 mln to
Pokrovske.

 

Donetsksteel’s only line of business is buying raw
coal from Pokrovske, enriching it via a tolling scheme at Svyato-Varvarynska,
and selling the resulting coking coal concentrate.

 

Dmytro Khoroshun: Metinvest
needs to affirm its supposed intention to consolidate profits and cash flows at
Pokrovske coal business assets and to stop allowing Donetsksteel to reap
substantial profits and cash flows from coal enrichment.

 

Namely, in its March presentation, Metinvest reported managerial
estimates for financials of Porkovske coal business (which does not include
Donetsksteel) that included USD 144 mln of EBITDA for 2020. This compares with
the 2020 IFRS-reported USD 61.4 mln for Pokrovske (a consolidated figure that
includes Svyato-Varvarynska) and USD 78.2 mln for Donetsksteel. We conclude
that even though Metinvest’s management agrees that Donetsksteel’s
participation in profits of Pokrovske coal business should be minimal, as of
2020 Donetsksteel continued to profit substantially. Judging from the published
IFRS accounts, most clearly from the free cash flow data, Pokrovske coal
business has so far been a cost and CapEx center (FCF a negative USD 3 mln in
2020), while Donetsksteel has been a profit center (FCF of USD 263 mln in
2020).

 

It is possible that this will stop after Metinvest
acquired control of Pokrovske coal business in March, which would be positive
for Metinvest.

 

However, we reiterate that if Donetsksteel stops being
a beneficiary of Pokrovske coal business’ enrichment activities, then it
becomes entirely unclear how Donetsksteel intends to repay its substantial
restructured debt. So far, Metinvest has not disclosed that it will support
with cash, in any form, Donetsksteel’s debt repayment efforts, but this needs
to be affirmed explicitly.

We maintain our neutral view on METINV bonds.