TEXT-Fitch assigns Fintest Trading Co Limited 'B'; outlook stable

(The following statement was released by the rating agency)

Oct 12 - Fitch Ratings has assigned Ukrainian-based mining and metals company Fintest Trading Co Limited (Fintest) Long-term foreign and local currency Issuer Default Ratings (IDR) of 'B'. The Outlook is Stable. Fitch has also assigned Fintest a Long-term National Rating of 'AA(ukr)' with a Stable Outlook.

The ratings are not constrained by Ukraine's sovereign ceiling so an upgrade of the sovereign ceiling would not automatically lead to an upgrade of the company's IDR.

The Stable Outlook is supported by Fitch's expectation of positive free cash flow (FCF) generation over the medium-term.

Fintest is a holding company of Donetsksteel Group. Fintest's vertically integrated business model is viewed by Fitch as an advantage, as it decreases the company's exposure to the highly volatile prices of mining products. Fintest owns production facilities in coking coal, coke and ferrous metallurgy segments.

The Pokrovskoye mine, owned by Fintest, is the third largest independent producer of coking coal in the Commonwealth of Independent States (CIS) with an output of 6.9mmt in 2011. Its reserve base, exceeding 270m tons of coking coal, provides a mine life of approximately 40 years.

Demand for the company's coking coal is expected to be stable in medium-term, as the mine is favourably located in close proximity to its main customers, in a region with a shortfall (Ukraine imports up to one third of its coking coal). The high quality of the coking coal produced by Pokrovskoye provides an additional comfort as it contributes to Fintest's negotiating power compared with other producers of coking coal concentrate.

Approximately two thirds of coking coal concentrate is used by the company internally for coke production. The company owns two coking plants with eight coking batteries which produced 2.6mmt of coke in 2011. High quality coal and technologically advanced coking facilities allow production of premium quality coke. Fintest is the largest player in the Ukrainian merchant coke market with a 65% market share according to the company's data.

In the ferrous metallurgical segment the company is focused on pig iron (output of 1.1mmt in 2011), at the low value-end of the industry and typically exposed to high price volatility. However, the company is an important player in this niche market, having an 8% market share of the global exports of merchant pig iron, according to the company's data.

Launching a new electric arc furnace with an annual production capacity of 0.75mmt, which is expected to be completed in H113, will allow the company to improve its product mix, as the company will have an opportunity to increase the utilization rate of its rolled metal production facilities. However, the company's high exposure to semi-finished products will remain.

Factors constraining the company's ratings include its limited geographic diversification as the company's operating assets are located in Ukraine. In Fitch's view exposure to this country entails higher-than average political, business and regulatory risks. The concentration of the company's coal mining within a single coal deposit makes Fintest exposed to additional operational risks. The company exploits two independent mine shafts, which mitigates the risk of the full termination of coal mining operations in case of technical accidents.

According to Fitch's base case expectations, the company will have an EBITDAR margin of 14% in FY2012, 16% in FY2013 and 17% in FY2014 (FY2011: 19.7%). The decrease of profitability in 2012 is explained by the unfavourable price dynamics for mining companies in FY2012. This will lead to an increase in funds from operations (FFO) adjusted gross leverage to 2.9x (FY2011: 1.7x). In the medium-term, due to slightly positive free cash flow (FCF) generation, the company's FFO adjusted gross leverage is expected to decrease to 2.5x by end-2013 and to 2.2x by end-2014.

The company's current liquidity position is viewed by Fitch as satisfactory. However, the peak debt repayment in FY2014, amounting to more than USD450m, will not be covered by the company's expected FCF of USD80m. Refinancing will therefore be necessary.


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

- FFO adjusted gross leverage below 2.5x on a sustained basis - Successful refinancing of the debt due in 2014

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

- Inability to roll over maturing debt and attract new financing to meet debt obligations

- FFO adjusted gross leverage above 3.5x on a sustained basis

((Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.reuters.com@reuters.net))