Metinvest limits Donetsksteel involvement in coal enrichment

Shareholders of private joint stock company (PrJSC)
Pokrovske Coal plan to approve at their Nov. 19 EGM deals for sales, during
2021, of up to USD 209 mln of raw coal to Svyato-Varvarynska Enrichment Plant
LLC, according to the proposed EGM agenda published on Oct. 18.

 

Two other 2021 deals that are also up for approval at
the EGM are sales of up to USD 152 mln of coal concentrate to Azovstal and
purchases of up to USD 203 mln of coal products from Svyato-Varvarynska.

 

At their Apr. 29 AGM shareholders of Pokrovske Coal
approved delegating to the management signing deals for coal concentrate
trading, during the period of one year, with Avdiivka Coke (USD 322 mln) and
Azovstal (143 mln).

 

At their Oct. 6, 2020 AGM shareholders of Pokrovske
Coal approved delegating to the management signing deals for sales of up to USD
437 mln of coal products to PrJSC Donetsksteel (until May 1, 2021).

 

Pokrovske Coal’s revenue amounted to USD 307 mln in 2020(16% less yoy), most of it from sales of raw coal. Its EBITDA was USD 61.4 mln
in 2020 (-49%).

 

In 2020, Donetsksteel’s revenue was USD 377 mln (24%
less yoy), most of it from sales of coal concentrate, and its EBITDA was USD 78.2
mln (-46%).

 

Donetsksteel’s business used to be buying raw coal
from Pokrovske Coal, enriching it at Svyato-Varvarynska (via a tolling scheme),
and selling the resulting coal concentrate.

 

Pokrovske coal owns 55% in Svyato-Varvarynska, and by
end-June Metinvest had consolidated more than 99% in each of these two assets,
which comprise the so-called Pokrovske coal business. Metinvest has not
consolidated control of Donetsksteel, in which it purchased 24.99% in 2018.

 

Dmytro Khoroshun:Donetsksteel’s share of profits from its involvement in Pokrovske coal business
should decrease, which will be positive for Metinvest.

 

We conclude this from Pokrovske Coal’s direct sales of
raw coal to Svyato-Varvarynska in 2021 and the absence of Donetsksteel as a
counterparty to significant 2021 deals.

 

We have long been wondering how Donetsksteel will
service its debts (about USD 1.34 bln) once it has
been denied making money from enriching coal mined by Pokrovske Coal. We do not
exclude Metinvest’s shareholders eventually settling Donetsksteel’s debts using
dividends they receive from Metinvest, which might amount to as much as USD 1-2
bln in 2021.

 

In any case, it is our current understanding that
Metinvest will not consolidate Donetsksteel, and therefore the issue of
Donetsksteel’s debts should not impact Metinvest’s credit profile.

 

We maintain our neutral view on METINV bonds.