In order to pay off the debts after 2020, the mining and metallurgical company Mechel, Igor Zyuzin, may part with the largest investment project, Elga, this year, told Vedomosti five interlocutors who are close to different parties to the possible deal. There are several key contenders for the asset; Rostec, Vostokugol, Dmitry Bosov and Alexander Isaev, or Koulstar, by Eduard Hudainatov, may take up the project. Five people know about the desire of Vostokugugol and Rostec to participate in the Elga project, that Koulstar became interested in the asset - two interlocutors of Vedomosti. The interlocutors do not name the sum of the future transaction. Which of the interested parties will receive what proportion of the asset is being discussed.
Debts instead of development
At the beginning of 2019, Mechel’s creditors began searching for claimants for the company's shares and Gazprombank in Elga, several people said. Rostec's CEO Sergey Chemezov, they continue, suggested that the country's leadership approve the sale of Elga - “the development of the Far East and one of Russia's largest coking coal deposits, Elgi, must be accelerated” (reserves of over 2.2 billion tons). One of the interlocutors believes that an over-credited Mechel (debt - 5.1 EBITDA) could transfer the deposit to another player, with a smaller credit load. After 2019, Mechel will either have to restructure its state-owned banks again, or pay off debts, he says.
The role of "Rostec", "Vostokugol" and "Colestar" interlocutors "Vedomosti" see differently: two people - that they will be owners of Elga, the other two - that they will only manage the asset. Hudaynatov, through a representative, conveyed that “the Koulstar company did not receive an offer to redeem Elga and did not negotiate with anyone”.
Representatives of VTB, Gazprombank, Sberbank, VEB, Vostokugol and Rostec declined to comment. “Investors are interested in Elga, and the bank is interested in selling the deposit, for it is a non-core asset,” says a person close to Gazprombank. A representative of Mechel announced that the company did not know anything about the deal. The interlocutors of Vedomosti explain that there were no official proposals to Mechel.
“Elga is the main project of Mechel, without it there will be nothing interesting from the company,” says Kirill Chuiko, head of the analytical department at BCS Global Markets. Mechel owns 51% each of the three assets of the Elga project - Elgaугule, Elga Road and Mechel Trans East, 49% each of these companies are owned by Gazprombank.
It is assumed that the buyer or consortium will acquire 100% of the entire Elgin project, say three interlocutors of "Vedomosti".
Mechel invested more than 100 billion rubles in the development of the Elga deposit, including 77 billion (including VAT) in the construction of 321 km of the Ulak-Elga railway, until 2020 it was planned to invest another 8.4 billion rubles, reported Mechel. The field should reach its full capacity - 28.2 million tons of salable coal per year - by 2027, the company predicted.
How Mechel Resisted
Back in 2013, Mechel laid 49% of the Elga project in VEB for project financing of $ 2.5 billion, and received only a bridge loan of $ 167.3 million. VEB did not give the rest: in 2014, Mechel started difficulties with creditors - VTB, Sberbank and Gazprombank, most of the debt to them was foreign currency. Zyuzin was summoned to the government several times, the creditors wanted to take away the company, but Mechel established relations with the bankers. Most of the company's property was in cross pledges. In 2016, Zyuzina restructured loans in two state banks and Gazprombank in ruble loans, received a deferment in repaying the principal (then 433 billion rubles) until 2020. Mechel had to partially repay debts, for 34.3 billion rubles. sell 49% of Elgi to Gazprombank and give him a put option: a bank in April 2021 could force Mechel to buy its stake in Elga. In 2016, Mechel received a free cash flow of 48.7 billion rubles. and the first since 2011 profit - 7.1 billion rubles.
“Mechel” is only enough to pay interest, at best, a small part of the debt, ”the investment banker familiar with the company's management sighs. By the end of the third quarter of 2018, the debt of Mechel decreased only by 2.7% compared with 2017 - to 421 billion rubles. In 2017, Mechel paid banks for the use of loans of 32.5 billion rubles. with a cash flow of 63.3 billion and another 17.1 billion - for the first half of 2018 with a cash flow of 34.8 billion rubles.
Future without Elga
Mechel is not the first to get rid of property: the company sold Bluestone in the United States, refused enterprises in Romania and the United Kingdom, Bulgaria and Russia, tried to sell the company in Ukraine, but was seized by the authorities of the self-proclaimed DNR.
“Mechel cannot make large repayments even at the current coal prices, if they fall a little, it can stop paying interest,” the investment banker notes.
The Elginsky project without debt (about $ 200 million), in its current form (it produced 4.2 million tons in 2017, and 3.9 million tons of coal in 2017 – September 2018) is hardly worth more than $ 1 billion, according to investment banker. Moreover, Mechel has only half of the project, he recalls, that is, it is unlikely to make more than $ 500 million to earn: “With a debt of $ 7–8 billion, the deal will not help Mechel much.
The cost of Elga, along with the debt is about $ 2 billion, according to estimates by a former employee of Gazprombank. Considering that Mechel has almost no capital expenditures, the company invests only in maintaining existing capacities, the fall in coal prices until 2020–2021. will be uncritical, and the Russian currency is weak, the company is likely to cope with interest payments, the expert believes. “Elga should have been a substitute for Yakutuglu, where there are not so many reserves left for open mining. But the profitability of the Elginsky project depends on coal prices: with current coal it is interesting, but prices will soon begin to decline, Chuiko concludes.