Ukraine Markets Daily (November 29, 2016)

Market news

  • Metinvest’s sales revenue increased by 2% m/m in September, 2016
  • AEG secures US$ 6 mn funding for CoalSwitch

Market comment

The UX index was down by 0.3% Yesterday, and the PFTS index (in UAH terms) was down by 0.1%. The WIG-Ukraine index was up by 0.7%. On the interbank exchange market, the USD/UAH was down by 0.2% to UAH 25.66 (mid price), according to Bloomberg. The official exchange rate reported by the NBU was UAH 25.66.

 

Metinvest’s sales revenue increased by 2% m/m in September, 2016

On November 28, 2016, Metinvest B.V., the parent company of a vertically integrated group of steel and mining companies, disclosed its monthly report for September 2016, as required by the clauses of the company’s debt negotiation schedule. According to the report, the company’s revenue increased by 2% m/m in September and amounted to USD 565 mn, after having contracted by 2.3% m/m in the previous month. Iron ore production (+6.8% m/m), together with the production of coke (+38.5% m/m) led the revenue increase. However, Metinvest reported a reduction of 3.8% m/m in Adjusted EBITDA to the amount of USD 128 mn, slowing from a monthly contraction of 9.5% m/m in the previous month. Operating cash flow before working capital changes remained steady at USD 104 mn, leaving a net cash flow from operations in the volume of USD 27 mn (-84% m/m). Metinvest increased the net cash used in investing activities by 5% m/m to USD 23 mn, whereas net cash flow used in financing activities decreased by 50% m/m to USD 26 mn. The company’s balance of cash and cash equivalent contracted by 9% m/m in September and amounted to USD 239 mn. In the meantime, Metinvest total debt fell by 1% m/m to USD 2.907 bn.

Our view:

Metinvest benefitted from favorable global iron ore development, on top of the gradual recovery of operations in its core Donbas production base. In the meantime the negative EBITDA development still highlights the need for a restructuring of the company’s debts in order to reduce the burden of interest payments on its cash flow.

 

AEG secures US$ 6 mn funding for CoalSwitch

Active Energy plc (“AEG”), the London quoted renewable energy, forestry management and timber processing business, on November 28th announced that it secured funding for its 1st industrial-scale CoalSwitch plant, enabling the next vital step of the technology’s commercialization. The technology utilises low value wood, timber, forestry and pulp mill/ saw mill by-products to produce the world’s first ‘drop-in’ biomass fuel that can be mixed at any ratio with coal or completely replace coal in existing unmodified coal powered fire stations globally. The funding will be provided as a 5-year loan instrument, bringing significant upside for the current shareholders of AEG. We note a STRONGLY POSITIVE impact of the news on the company and reiterate our target price of USD 0.234 per share (GBp 18.7). The Company secured the US$ 6 mn five-year unsecured loan facility to fund the construction of a 35,000 tonne per annum commercial reference plant in North America, which is capable of producing revenue of over US$ 6.3 mn per annum based on the Company’s current projections. The funding will be provided by Linarus FZE (‘Linarus’), a private Dubai-based investment company which had previously provided funding for the early-stage development of CoalSwitch. Recent testing by Rocky Mountain Power (“RMP”), part of PacifiCorp, a major US utility (and a key component of Warren Buffett’s Berkshire Hathaway group), has proven that CoalSwitch behaves better than coal in every respect in the handling of feedstock to the power station as a drop-in replacement for coal. RMP testing has reiterated that AEG CoalSwitch can be used as a direct replacement for coal at a coal fired utility. RMP will now prepare for commercial testing of the CoalSwitch product at one of its Utah facilities as soon as production of product from the new reference plant commences, as it aims to replace 10% of its coal feed with biomass fuel like CoalSwitch. Richard Spinks, Chief Executive Officer of Active Energy said: “This is a landmark moment for AEG. The funding unlocks our ability to commercialise our revolutionary and proven CoalSwitch technology and will enable us to generate meaningful revenues within the USA, which is set to be one of our core geographic markets. Additionally, we are delighted with RMP’s public support for our product. Not only is it positive in terms of our future relationship with RMP but we anticipate that this will aid our ongoing discussions with other potential customers going forward.”

Our view:

The news is STRONGLY POSITIVE for the company stock, as this financing is a milestone in a further commercialization of the innovative CoalSwitch technology. Building of an industrial-scale CoalSwitch plant will enable testing of the CoalSwitch product at industrial-scale power plants, which will spur construction of similar or larger scale plants around the world, including in the USA, Canada, Europe and Asia. Additionally, the development of a CoalSwitch technology will significantly enhance the value of the Company’s Canadian JV on timber management of 108,000 ha of forests in Alberta, Western Canada. Thus, we reiterate our target price of USD 0.234 per share (GBp 18.7), implying a significant upside to the current market price.