Metinvest might bid for Dniprovskyy Steel assets

Ukraine’s largest steel producer Metinvest (METINV)
might participate in a tender for the PP&E assets of Dniprovskyy Steel, a Ukrainian
steel plant, according to an April 30 release by the Antimonopoly Committee of
Ukraine (AMCU).

 

Metinvest proposed to take on certain responsibilities
during the next three years after its possible acquisition of Dniprovskyy
Steel’s PP&E assets in order to alleviate the possible negative impact on
the markets, according to the AMCU. The responsibilities include selling at
least 12 kt per year of merchant pig iron at market prices to third parties if
there is demand, as well as reporting to the AMCU its merchant pig iron sales
at the Ukrainian market, the AMCU said.

 

Recall, in February Metinvest said it had not decided whether it
will participate in a tender for Dniprovskyy Steel PP&E assets. Metinvest
mentioned the poor technical conditions of Dniprovskyy Steel assets as a factor
preventing the holding from bidding for them.

 

Dniprovskyy Steel entered receivership in October
2020, with creditor claims amounting to UAH 130 bln (USD 4.7 bln), including
UAH 20.9 bln (USD 751 mln) by Optimal Trade LLC and UAH 20.7 bln (USD 744 mln)
by Metinvest Holding LLC, according to Interfax-Ukraine.

 

In 2020, Dniprovskyy Steel produced 2.58 mmt of crude
steel (+16% yoy), its revenue was USD 1.02 bln (+2%), and its unadjusted EBITDA
was a positive USD 3 mln (a negative USD 541 mln in 2019), according to the
plant’s 2020 financial report released on April 30. Its net operating cash flow
was USD 11 mln in 2020 (7x yoy) and its CapEx was USD 9 mln (2x yoy).

 

Dmytro Khoroshun: We continue
to consider it unlikely that Metinvest acquires Dniprovskyy Steel’s assets even
if it decides to participate in a tender for their sale.

 

In case Metinvest does acquire Dniprovskyy Steel’s
assets, we expect the holding to present its plans to bring the assets to
profitability levels commensurate with the price it pays. Improving the
profitability of Dniprovskyy Steel’s assets should be possible via capital
investments and operational improvements.

 

Acquiring the assets in poor technical conditions from
a distressed seller might be an opportunity for the buyer (possibly Metinvest)
to create value, but a critical element would be the deal price.

 

It might also be possible for Dniprovskyy Steel’s
assets to unlock the full value of its product sales if it is eventually
acquired by Metinvest, we think. For example, in 2020 Dniprovskyy Steel’s main
product was square billets, of which it sold 1.87 mmt at an average price of
USD 344/t on ex-works basis, we estimate (USD 361/t full realized price less
the average USD 16/t selling expenses). This price is USD 54/t below the
average 2020 FOB Ukraine price as reported by Metal Expert, which we feel might
be higher than what the average difference between FOB and ex-works prices should
be.

 

Dniprovskyy Steel’s realized ex-works billet price was
also USD 64/t below the USD 408/t price realized by Metinvest for its resales
of 1.35 mmt of square billets in 2020 (most of which was Dniprovskyy Steel’s
billets).

 

We maintain our neutral view on METINV bonds.