Metinvest sees possibility to sign standstill with banks

Ukraine’s largest steelmaker and iron ore miner Metinvest (METINV) may sign a standstill agreement with banks by Nov. 30, CEO Yuriy Ryzhenkov suggested in a public comment to media on Nov. 27. The agreement has been preliminarily agreed upon already, but has yet to be inked, he said. Doing so would start comprehensive restructuring talks involving banks and bondholders on Metinvest’s total debt of USD 3.07 bln. Ryzhenkov suggested the negotiations wouldn’t end quickly, and Metinvest expects to finalize the talks during the next couple of months. The company continues to service the interest payment on its debt, despite facing certain difficulties in doing so, and may discuss the scope of future interest payments with creditors as well, Ryzhenkov stated.

Ryzhenkov also expressed quite a negative outlook regarding both the steel product and iron ore markets, taking into account that prices are already at decade lows. Metinvest is selling the bulk of its products at prices above variable costs and is close to Russian peers on the cost curve of steel products, he admitted. Metinvest doesn’t rule out the possibility of suspending operations at some of its mining or steelmaking facilities in response to ongoing declines in prices, he said. However, if they remain at current levels going forward, the company will be able to muddle through, he added.

Metinvest also plans to unite two of its steelmaking subsidiaries, located in Mariupol, Ilyich Steel and Azovstal, into a single entity, thus cutting costs by uniting auxiliary shops, which are loaded by just 30-40% currently. The steelmaking capacity of both enterprises won’t change as Ryzhenkov revealed that Azovstal will retain its 6 mmt of steel capacity while 4 mmt could be produced at Ilyich Steel.

Roman Topolyuk: We see two important implications from Ryzhenkov’s comments. First, signing a standstill with banks proved to be a not-so-simple exercise, as five months already elapsed after a standstill was agreed upon with bondholders. Despite a standstill being a mutually beneficial step for the company and its creditors, the ongoing attempts to put it to paper indicates possible points of tension during negotiations that have yet to commence.

Second, the comments regarding the cost position of Metinvest imply that the company is hardly breaking even operationally. Metinvest isn’t earning much on its steel, to say the least, with the integrated cash cost of slabs of USD 200/t for Russian steelmakers, an additional USD 15/t that the complicated logistics of raw materials pose to metallurgical enterprises in war-torn Donbas, delivery to port and loading costs of USD 15-20/t, and current FOB slab prices of USD 233/t. The margin earned on selling long steel products is more material (as billet prices are around USD 270/t, FOB, Black Sea port, and rebars are quoted at USD 295/t), but long products represent only 17% of the total product mix of Metinvest’s steel products.  Without significant price recovery, which we think isn’t likely during the next quarters, or without significant hryvna devaluation, the company will face liquidity gaps or may require significant write-offs on its debt, we estimate.