Small private investors in Ukraine's coal mining are in trouble. Falling demand and overproduction by subsidized state monsters are making small private companies suffer losses and go bust.
The latest
victim in the industry is Canadian EastCoal, the owner of Verticalnaya
anthracite mine in Luhansk Oblast, which filed for bankruptcy on Nov. 8. EastCoal is the only foreign-owned small
company in the sector, with a minority Ukrainian partner.
Other
industry players have been posting losses this year and are basically on the
brink of survival, according to Eughen
Tymoshenko, an expert at Integrites law
firm. He says the high prime cost of extraction and lack of integration into
large industrial holdings are the two ingredients that make crises and losses
more likely.
With
EastCoal, the troubles were brewing for some time. In March 2013, the company
laid off 400 coal miners at Verticalnaya and Mariya-Hlyboka mines. According to the company’s statement
published by UNIAN news agency at the time, with this decision EastCoal made a
desperate attempt to improve the financials and prevent further layoffs. The
company said that prices for coal halved over the past year, with a ton of
coking coal selling for Hr 900 in March 2013.
However,
the emergency measures didn’t help: at the end of August EastCoal broke the
lease agreement and returned Mariya-Hlyboka mine to the state. On Oct. 21 the
company stopped coal extraction at Verticalnaya mine and suspended trading of
its shares at Toronto and London stock exchanges.
After its
bankruptcy announcement EastCoal has “30-day stay of proceedings that will
protect the company and its assets from the claims of creditors while the
company pursues its restructuring efforts,” according to the statement. This
30-day period may be renewed with the authorization of the Supreme Court of
British Columbia.
“The company is actively seeking further sources of funding although
there can be no guarantee that the company will be successful in securing
further financing or achieving its restructuring objectives. Failure by the
company to achieve its financing and restructuring goals will likely result in
the company becoming bankrupt,” the statement says.
The company did not respond to the Kyiv Post’s request for additional
comments.
Other companies, such as Luxembourg-based Sadovaya Group and Coal Energy
that are listed at Warsaw Stock Exchange, have difficulties with production and
sales this year. For instance, Sadovaya Group ended the first half of 2013 with
a loss of $7.6 million, compared to net profit of $2.8 million at the same
period of 2012.
“The coal market remained slow with coal demand and coal prices falling
on the back of weak coal consumption by Ukrainian electricity generation
industry,” Sadovaya Group, whose majority shareholder is Ukrainian businessman
Alexander Tolstoukhov, explained in its report. In September the company failed
to pay interest on a loan to European Bank for Reconstruction and Development.
The group’s statement said that it “may be considered as the event of default
by the creditor.” Now Sadovaya Group is
discussing loan restructuring measures with EBRD.
Coal Energy, majority owned by Ukrainian businessman
Viktor Vyshnevetsky and his wife, ended 2013 financial year (which ended on
June 30) with $16.9 million losses compared to $39.1 net profit in 2012.
Company’s thermal coal sales in 2013 show 18.2 percent decrease compared to
2012 data. However, the last quarter of the 2013 financial year was strong
“mainly due to selling thermal coal at a decreased coal price on the domestic
market,” the report says.
“All these three companies have a single common trend
– they have started to produce and sell much less coal and entered the zone of
losses in 2013,” Tymoshenko says.
Among the factors that affect the performance of coal
mining companies expert names inefficiency and non-transparency of internal
coal market, as well as governmental support for state-owned mines to the
detriment of the corporate sector. EastCoal, however, is also burdened with
debt, while its business development plan has a long payback period, Tymoshenko
believes.
Weak demand for coal is one of the biggest problems at
the moment, says Concorde Capital analyst Roman Topoliuk. This is due to a decline in industrial
production, as well as the fire at Vuhlehirska thermal power plant in Donetsk
region in March. It was one of the
biggest coal consumers of domestic coal.
Moreover, nuclear power plants have increased its
cheap electricity production and thermal power plants have been forced to
reduce the volume of coal purchase.
At the moment prime cost of one ton of coal extracted
at private mines is about $55-60, which is close to sales price, according to
Topoliuk. For development of the industry, market recovery and price growth to
about $75 are needed.
But at bulky state companies the cost of production is
even higher. According to the Energy Ministry statistics, in October the
production cost of one ton of coal was
Hr 1235.6 ($154). At the same time, the sale price was 2.5 times less –
Hr 479.5 ($60).
Coal mines that survive reasonably well in these
conditions are the ones integrated into energy holdings. For example, Rinat Akhmetov’s energy holding
DTEK in January-June had a net profit of Hr 1.197 billion. The company has a
full cycle production where mines sell to the holding’s own energy generators.
Kyiv Post staff writer Kateryna Kapliuk
can be reached at [email protected].
