Business news from Ukraine


KYIV. Aug 11 (Interfax-Ukraine) – Yuzgas B.V. (the Netherlands), which won the tender for an investor in the production sharing agreement (PSA) for hydrocarbons extraction on Yuzivska field (Donetsk and Kharkiv regions), has undertook during the first five-year phase of the PSA to invest $200 million in geological exploration.

“In particular, during the first year the sum will be $20-30 million,” Nadra Yuzivska Director Viktor Nazarkevych said at a press conference in Kyiv.

He added Yuzgas, founded by the Emerstone Energy private equity firm, which provided guarantees for $200 million, has also committed to drill the first well in the first year.

Nazarkevych noted the offers of other participants were significantly worse: Vitol oil trader’s subsidiary Balkhash with $10 million, and Burisma Holdings with UAH 2.7 billion (equivalent to $108 million).


KYIV. Aug 11 (Interfax-Ukraine) – Fitch Ratings has upgraded Ferrexpo plc’s (Ferrexpo) Long-Term Issuer Default Rating (IDR) and Ferrexpo Finance Plc’s senior unsecured rating to ‘CCC’ from ‘CC’, reads a posting on the rating agency’s website.

“The Recovery Rating on the senior unsecured rating is ‘RR4’. Ferrexpo’s Short-term IDR has been affirmed at ‘C’,” according to the report.

“The upgrade reflects the improvement in Ferrexpo’s liquidity position in comparison with our previous expectations due to higher than expected iron ore prices in H1, 2016 (average $52 per  tonne vs. $45 per tonne expected by Fitch) and sustainably high pellet premiums ($25/tonne). In July, Ferrexpo paid the final amortization of its $420 million pre-export financing (PXF) from internally generated cash flow,” Fitch experts stated.

“The group has a further $350 million PXF, which starts to amortise in November 2016 with eight quarterly payments of $43.8 million ending August 2018. We assume that Ferrexpo’s FCF will be around $250 million for 2016 and 2017 and as a result the group will be able to fund these debt payments from internally generated cash,” they said.

The group’s other significant debt instrument is a $346 million eurobond that matures in two equal instalments in April 2018 and April 2019. We believe Ferrexpo will able to fund the first installment of $173.2 million through internally generated cash. However, there is high potential downside risk as iron ore prices remain volatile.

Despite its sound operational profile, refinancing risk for the company remains elevated due to its Ukrainian exposure.

Key rating drivers

Competitive cost producer

Ferrexpo’s operating cost position sits within the first quartile of the global pellets cost curve. In H1, 2016, cash costs improved significantly compared with the previous two years, mainly due to currency depreciation dynamics (50% of operating costs are linked to the hryvnia) and a sustained drop in energy prices. These positive dynamics plus operating efficiency gains resulted in a 23% decrease in year-on-year costs in H1, 2016, reaching $25.7 per tonne, down from $33.4 in H1, 2015. Energy costs now represent around 40% to 50% of total costs, and should contribute to a further reduction in comparative cost levels in H2, 2016.

Ukrainian risk exposure

“Ferrexpo’s operating base is in Ukraine. In the past two to three years the country has experienced high domestic inflation, combined with significant currency depreciation (85% in 2015 vs. U.S. dollars and greater than 125% since 2014), and some delays in VAT repayment by the state. However, military conflict in Donbas region has not directly impacted Ferrexpo’s operations and transport infrastructure due to their location in Poltava region, approximately 425 km north of Donetsk. For 2016 our forecasts assume an average rate of around UAH26/$1, which is in line with the H1, 2016 rate of UAH 25.47 per $1,” reads the document.

Continuing profitability

“Cash costs improvements, together with the pellet premium received over the benchmark 62% iron ore price, have partly offset the 11% drop in top line revenues that followed the fall in iron ore prices in H1, 2016 compared with H1, 2015. As a result, Fitch expects Ferrexpo’s profitability to remain stable, with an EBITDA margin ranging between 30-35% (H1, 2016: 35%) in the medium term. Ferrexpo’s funds from operations- (FFO) adjusted gross leverage was 3.4x in 2015 (vs. 3.6x in 2014) and will decline in 2017 due to our expectations of a slight EBITDA improvement resulting from momentum iron ore prices recovery in H1, 2016, as well as debt reduction, both in absolute terms,” the experts added.

Iron ore premium pellet producer

In H1, 2016, 62% iron ore prices averaged $52 per tonne, down approximately 15% y-o-y and down 58% since February 2014, reflecting oversupply in the global market and in particular a slowdown in demand from the Chinese steel industry.

“However, Fitch expects the demand for premium quality pellets, which are used to make steel, to remain sound. We expect premium pellet supply to be limited in the next couple of years due to the disrupted supply from Samarco and the high capital cost of new pellet plants additions. Ferrexpo compares favourably with its competitors in the premium pellet market. It has long-term contracts with European producers and North East Asian producers. The headline long-term contract pellet premium in the key markets of Western Europe and North East Asia was on average $31 per tonne in H1, 2016 compared with an average of $17 per tonne over the same period in China,” according to the statement.

Key assumptions

– Fitch iron ore price deck: $45/tonne in 2016 and 2017, $50/tonne in 2018, $50/tonne in the long term

– $25/tonne-$30/tonne price premium for pellets

– Production volumes: 11.7 million tonnes per year iron ore pellets in 2016-2018

– $40 million capex in 2016 and 2017

– UAH 26/$1 in 2016 and UAH 28/$1 in 2017

Rating sensitivities

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

– Lowering of Ukraine’s Country Ceiling.

– Material shortfall in pellet premiums or iron ore prices beyond our assumptions without access to alternative sources of liquidity.

– Default becoming imminent or inevitable, including a payment default or a debt restructuring in a form we would consider a distressed debt exchange.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

– Strengthening of Ferrexpo’s liquidity position due to new sources of financing, a sustainable renegotiated debt maturity profile or higher than expected iron ore prices and/or pellet premiums.

-An improvement in Ukraine’s Country Celling, or sufficient evidence that Ferrexpo should not be constrained by it.


At the end of July 2016, according to Fitch’s estimates, the company’s cash balance was around $50 million vs. $158 million in short-term debt ($56 million in H2, 2016 and $102 million in H1, 2017), and $47 million coupon/interest ($24 million in H2, 2016 and $23 million in H1, 2017). The $156 million short-term debt is composed of $136 million of quarterly PXF instalments starting in November 2016 and $20 million of other debt.

“We forecast that the company will generate approximately $250 million of FCF over the next 12 months (post interest/coupon). This should be just enough to service the company’s debt, working capital and capital expenditures for the next 6 to 12 months, but leaving it exposed to further fluctuations in iron ore prices, currency and energy costs,” the experts said.


KYIV. Aug 11 (Interfax-Ukraine) – Public joint-stock company Ukrzaliznytsia seeks to start implement an investment project to electrify the Dolynska-Mykolaiv track section in 2016 jointly with the European Investment Bank (EIB), Ukrzaliznytsia Board Chairman Wojciech Balczun has said.

“The Dolynska-Mykolaiv track section is being electrified. We are preparing an investment project there. We held negotiations with the European Investment Bank that would finance the investment and we will launch the project this year,” he said.

Balczun said that the decision to electrify the Kovel-Izov section has been made.

In addition, Ukrzaliznytsia is preparing documents to expand the capacity of the line connecting Mariupol with other cities and towns to 30 train pairs a day.

Head of Odesa Railways Hryhoriy Boiko said in October 2015 that works on the electrification of the Dolynska-Mykolaiv railway section are estimated at EUR 290 million.

In April 2016, Acting Ukrzaliznytsia Board Chairman Yevhen Kravtsov expressed hope that cooperating with the EBRD and the European Investment Bank, Ukrzaliznytsia will able to raise funds for electrification of top-priority routes, in particular, the Dolynska-Mykolaiv section.


SUMY. Aug 11 (Interfax-Ukraine) – Kusum Pharm LLC (Sumy) intends to use the opportunities of import replacement to double production capacity of the Sumy plant in 2018 and 2019, the co-founder and Director General Rajeev Gupta has said.

“First partially and later fully we will switch over to production of medicines we now import from our plant in India to Sumy,” he told reporters during a recent visit of Indian Ambassador to Ukraine Manoj Kumar Bharti to Sumy.

Gupta said that the Sumy plant could start producing 50 more medicines, and their number would double.

He said that this year the company seeks to expand warehouses by 1,500 square meters, to 4,000 square meters and next year – to expand the administrative building and the quality control department. Then the expansion of production facilities will start in 2018.

Gupta said conditions for attracting investment has been improved by cutting bureaucratic red tape and offering tax incentives for innovation companies.

Kusum Pharm LLC was registered in 2005. Its founders and owners on a parity basis are Gupta and Russian citizen Vladimir Lukyanenko via Swiss Torberg Beteiligungen AG.


KYIV. Aug 11 (Interfax-Ukraine) – Ukraine’s State Property Fund (SPF) has fully switched small privatization to electronic trading market platforms, the fund said on its website on Thursday.

According to the report, the decision was made to secure transparency and openness selling the facilities and to attract a larger number of potential buyers.

“Now all auctions to sell state-controlled immovable property, movable property, enterprises, including Dutch auctions, with land parcels or without them, are held only in the electronic form via the official privatization website, with a redirect to the electronic sites of exchanges selling state-run facilities,” the fund said.

The fund signed a memorandum of cooperation with eight exchanges. The exchanges will hold online auctions to sell small privatization facilities. The exchange network with which the fund cooperates is gradually expanding.

The fund said that first electronic trading to sell small privatization facilities started in December 2015. Since early 2016 as of August 1, 2016, the fund announced 246 electronic auctions, including nine Dutch auctions.

The SPF said that the share of small privatization facilities of total privatization in the country is 99%.

Auctions to sell small privatization facilities online are held in line with SPF order No. 1325, dated September 9, 2015.


KYIV. Aug 10 (Interfax-Ukraine) – Socar Ukraine Trade House LLC has shipped 8,400 tonnes of diesel fuel for public joint-stock company Ukrzaliznytsia, and this is 60% of the volume planned to supply as part of the contract signed on August 1 between the two companies, the press service of Ukrzaliznytsia has reported.

As of morning on August 8, 2016, Socar Ukraine Trade House LLC shipped 8,400 tonnes of diesel fuel. The contract signed by the parties on August 1 has been fulfilled almost by 60%,” the company said.

Ukrzaliznytsia said that at present the company does not receive diesel fuel under a contract signed on July 6 with WOG Aero Jet, as the contract price is UAH 20,900 per tonne with VAT, which is considerably higher than average market prices, being UAH 16,900-17,500 per tonne, according to information from Derzhzovnishinform of August 2, 2016. Center for Provision of Production of Ukrzaliznytsia is holding permanent talks with WOG Aero Jet asking to cut the price to the market level.

Ukrzaliznytsia said in the press release that electronic trading to buy 8,000 tonnes and 11,000 tonnes of diesel fuel were announced on August 5.

As reported, Socar Ukraine Trade House LLC first won a tender held by Center for Provision of Production of public joint-stock company Ukrzaliznytsia to supply diesel fuel, although the bidder of similar tenders WOG Aero Jet which price was 15.3% higher challenged the results of the tender.

Commenting on the claim of WOG Aero Jet sent to Ukraine’s Antimonopoly Committee, Ukrzaliznytsia said that the contract is considered signed, as the committee has not made any decision under the claim. The claim was published later than information that the contract is signed.

The press service of Ukrzaliznytsia added that WOG Aero Jet on August 1, 2016 also filed a claim to the National Anti-Corruption Bureau of Ukraine.

Ukraine’s Antimonopoly Committee said that purchase of diesel fuel from Socar by Ukrzaliznytsia is unlawful. The discussion of the claim scheduled for August 5 did not take place and was postponed.