Metinvest: 4Q12 production: Declines along with the market

4Q12 production: Slightly recovers QoQ, drops YoY. Metinvest\'s production failed to recover substantially in 4Q12 after the summer lull and showed that steel markets continued to weaken versus 2011. In 4Q12, the holding increased its output of metal products by 5% QoQ to 2.8mt, its coal mining output by 2% QoQ to 2.8mt, and its output of iron ore concentrate by 1% QoQ to 9.1mt. In YoY terms, Metinvest\'s 4Q12 output of metal products and ROM coal decreased 16% and 13%, respectively, while production of iron ore concentrate edged up 1%.

2012F leverage outlook stable, despite worse 4Q12. As Ukraine\'s total steel exports fell 12% QoQ and Ukrainian steel prices dropped 3-7% QoQ, Metinvest may report a decline in 4Q12 sales that is even sharper than that in production, and we expect the company\'s EBITDA to further shrink in 4Q12. Nevertheless, as Metinvest\'s EBITDA amounted to US$1.5bn in 9M12, it is likely to reach the upper end of the US$1.5-1.7bn range estimated by management for full-year 2012. Therefore, we maintain our forecast of Metinvest\'s net debt/EBITDA to be 2-2.2x by end-2012.

Hold METINV \'15, Buy METINV \'18. Over the last three months, spreads of METINV \'15 narrowed by 90-160bps to 200-500bps over its Russian peers, by 30bps to negative 50pbs over FXPOLN \'16, and by 170bps to 70bps over UKRAIN \'15. As we believe that Metinvest\'s fundamental outlook is less stable than that of its Russian peers and Ferrexpo, we find further potential of the spreads\' decline limited and thus downgrade METINV \'15 from Buy to Hold. At the same time, spreads of METINV \'18 shrank to a lesser degree, by 40-110bps, to 250-620bps over its Russian peers and to 170bps over UKRAIN\'18, leading us to view METINV\'18 as still attractive, causing us to reiterate our Buy recommendation for them.
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