Metinvest, affiliates acquire two Donetsksteel group assets

Ukraine’s largest steelmaker Metinvest (METINV) –
together with companies likely affiliated with its owners, including majority owner
SCM – acquired 100% ownership in Ukraine’s producer of coking coal concentrate
Donetsksteel and possibly a 40.8% stake in Ukraine’s largest coking coal miner
Pokrovske Coal (SHCHZ UK).

 

Donetsksteel, a Ukrainian producer of coking coal concentrate
(and formerly of iron and steel), reported in an Aug. 8 filing that Fintest
Trading Co. Ltd. of Cyprus (Fintest), as of Aug. 1, had reduced its stake in
Donetsksteel to 0% from 100% previously. Donetsksteel also reported that its
new owners are Metinvest B.V. (24.99%) and three other companies (each 24.99%).
The four new owners of Donetsksteel also each own 24.99% stakes in Industrial
Coal Holding LLC (ICH) of Ukraine, the majority owner of Pokrovske Coal.
Fintest is the top holding company of Donetskteel group.

 

In 2017, Donetsksteel produced 2.57 mmt of K-grade
coking coal concentrate (up 4% yoy) and 76 kt of pig iron (down 90% yoy). For
several years, Donetsksteel had been producing only pig iron at its
metallurgical branch (as much as 1.4 mmt in 2013, as its steel-producing
open-hearth furnaces were shut down in 2012) and coking coal concentrate at its
coal enrichment branch (4.79 mmt in 2013). The company said in its 2017 filings
that it had decided to cease the operations of its metallurgical branch,
located in occupied Donbas, and was in the process of liquidating its coal
enrichment branch, namely the Svyato-Varvarynska coal enrichment plant located
on the Ukrainian-controlled part of Donbas.

 

In its Aug. 9 filing, Donetsksteel reported that its
board decided to conduct an EGM on Sept. 11. The EGM has a broad agenda,
including replacing three supervisory board members and changing the company’s
statute and by-laws.

 

For 2017, Donetsksteel reported revenue of USD 562 mln
(down 4% yoy) and a negative EBITDA of USD -260 mln (vs. positive USD 114 mln a
year ago). At the end of 2017, Donetsksteel had USD 753 mln in short-term debt
on its balance sheet.

 

In 1H18, Donetsksteel produced 1.29 mmt of coking coal
concentrate (+19% yoy) and reported revenue of USD 265 mln (-15% yoy) and a
positive EBITDA of USD 127 mln (vs. negative USD 307 mln a year ago). The
company had USD 758 mln in short-term debt at the end of 1H18, including USD
425 mln owed to ING Bank N.V., USD 99 mln to Sberbank and USD 87 mln to VTB
Bank.

 

In a separate development, Pokrovske Coal, Ukraine’s
largest coking coal miner, reported on Aug. 8 that its shareholder registry
(which the company compiled to conduct a shareholder meeting) indicated that
Fintest, as of Aug. 1, had reduced its stake in Pokrovske Coal to 0% from 40.8%
previously. Pokrovske had no further information about the new owners of the
40.8% stake.

 

Recall, in August it was reported that ICH, the owner
of another large stake in Pokrovske Coal (57.3% since 2Q17) is owned by Metinvest B.V. (24.99%)
together with four other companies. Three of these companies – together 50.02%
in ICH – own 70.9% of Dniprovskyy Coke (the acquisition of which Metinvest has
been pursuing) and are likely affiliated with Metinvest’s majority owner, SCM.

 

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 (doubling yoy) and
the company’s EBITDA was USD 120 mln (up 8.7x yoy). Pokrovske Coal mines
K-grade coking coal and has more than 200 mmt of reserves. The company’s
production volume amounted to 2.16 mmt of run-of-mine coal in 1H18 (up 10% yoy)
and 4.35 mmt in 2017 (up 1% yoy).

 

Dmytro Khoroshun: These
developments resemble an outright acquisition-in-progress of Donetsksteel group
(Pokrovske Coal being the miner, and Donetsksteel – the enricher of coking
coal) by Metinvest and affiliates. Notably, it might be several quarters and
even years before Metinvest begins consolidating these assets on its books.
However, if the consolidation was to happen right now, it would likely be
credit-negative for Metinvest because Donetsksteel group’s debt, around USD 1
bln at least, is likely many times more than its EBITDA (note that Metinvest’s
net debt / EBITDA ratio amounted to 1.0x at the end of 1Q18).

 

Given Metinvest’s track record of treating its
creditors loyally, and provided there is no restructuring agreement between the
previous Donetsksteel owners and the group’s creditors, this USD 1 bln of
additional debt might end up becoming Metinvest’s to service. On the other
hand, Donetsksteel’s debt is not too large in comparison with Metinvest’s
current profitability: should Metinvest consolidate Donetsksteel (assuming USD
1 bln of debt and USD 100 mln of L12M EBITDA), its net debt / EBITDA ratio
would increase to 1.4x from 1.0x at the end of 1Q18.