The Ministry of Energy and Coal has published a list of 36 coal mines it is prepared to hand over to investors. This represents almost all the state's coffers have scraped together. International firms Ernst & Young and Deloitte, acting as government advisors, will assist the mines in finding new owners. It's possible that the Ministry of Energy and Coal Industry and the State Property Fund will agree to sell some of the mines for a symbolic hryvnia. The authorities acknowledge that the vast majority of the mines offered to investors are unprofitable.
Roll call according to the list
In total, the list for investors included 23 sites in the Donbas and 13 in the Lviv-Volyn Basin. Mines remaining in the territories of the self-proclaimed Donetsk and Luhansk People's Republics were, for obvious reasons, not included. However, it does include a number of sites located on the Ukrainian side, albeit very close to the current demarcation line. This represents an additional significant drawback for their investment attractiveness.
The list does not include a single mine producing anthracite and coke coal, which are in short supply in the country—grades G and D predominate. Production volumes at the coal enterprises proposed for privatization vary significantly, but only nine produced over 300,000 tons of coal in 2014 or 2013. Production below this level is considered insignificant in the industry, and not every investor would be willing to gamble with such volumes. One of the mines on the list (Vizeiska, Lviv Oblast) is no longer producing. Another, Novovolynska No. 10, is a long-term construction project with a high degree of completion that the state has been unable to complete. Furthermore, the investment list includes almost all the facilities (approximately a dozen) that the Ministry of Energy and Coal Industry had previously planned to liquidate or mothball.
Most of the mines listed decreased production last year (the war played a significant role), but 13 of them still showed positive growth. These are primarily mines in the western region. While their growth rates are significantly ahead of their eastern counterparts, their production volumes are even more sluggish. Among Lviv region mines, only the Chervonogradska mine, part of the Lvivvugol company, surpassed the 300-ton mark in 2014. Two more—Mezhyrichanska and Lesovaya—came close to this figure, producing 266,3 and 274,5 thousand tons of coal, respectively. However, for Donbas mines in peacetime, such figures would be considered quite mediocre.
It's also noteworthy that the majority of the mines on the list were commissioned in the 1950s and 1960s, while some were already in operation before World War II. The state hasn't invested a penny in some of the mines in the past three years. At others, coal production costs reach a staggering 5 UAH per ton. In short, potential investors will have a hard time choosing a worthy purchase from the list. Private coal miners estimate that only 20-30% of the listed mines are of interest. The vast majority of domestic coal mines, and the best of them, remain in territory not controlled by Ukraine.
Gems in the dust
The star attraction on the ministerial list, eclipsing all others in its brilliance, is the Krasnolimanskaya company. It is the only company in the state coal sector that does not require budget subsidies to cover the costs of finished product production or electricity. The cost of Krasnolimanskaya coal is the lowest in Ukraine – approximately 300 UAH per ton in 2014. Furthermore, the company operates its own coal enrichment plant. The company has adopted a program to increase coal production to 5-6 million tons per year. But that was back in peacetime; now such dreams must be forgotten. It is far more important to halt the precipitous decline in production, which last year amounted to almost 500 tons. In particular, coal production at Krasnolimanskaya fell from 1,4 million tons in 2013 to 0,93 million tons in 2014. Moreover, the Ministry of Energy and Coal Industry's forecasts for 2015 are far from rosy – only 675 tons of coal are expected to be mined.
The company's current design capacity is 2,25 million tons per year. The decline in productivity is compounded by the proximity of hostilities, a dispute between the current and previous directors over the position, and the presence of a certain Krasnolimanskoye LLC, established by Yanukovych's team, in the company's coal fields. But even taking into account all these aggravating circumstances, this asset has the highest chance of being sold of all 36, and not for the meager price.
Another potential millionaire is the Yuzhnodonbaske No. 1 Mine Administration, which includes three mines located near Vuhledar. Over the past decade, the company consistently produced over 1 million tons of coal annually, reaching 1,015 million tons as recently as 2012, but has since begun to decline. The Ministry of Energy and Coal Industry forecasts production here in 2015 to be between 800 and 900 tons. The company's advantages include its comparative youth (it began operations in 1973) and the significant investment it has made in new equipment in recent years (almost 300 million UAH in 2012-2013).
The neighboring Yuzhnodonbasskaya No. 3 mine named after Surgay could also generate interest, having distinguished itself by doubling its production volumes and revenue last year. This is a unique achievement among state-owned mines. Only two western Ukrainian mines, Velykymostovska and Vidrodzhennya, have demonstrated similar growth, but their progress has been slower and their physical production volumes are several times lower. However, they operate in a calm, peaceful region. This undoubtedly gives them an investment advantage. However, it is still not enough to be competitive in the privatization market.
The Lviv-Volyn Basin has long suffered from the lack of a modern coal enrichment plant. The Chervonogradska coal enrichment plant is in deep crisis and its ownership is unclear. But without enrichment, most Western coal is little more than slag. Only 30% of coal mined in the region has low ash content; the rest has ash content above 50%. For thermal power plants, this is a third-rate commodity that would be completely ignored if there weren't a shortage of Donbas fuel.
The Volyn Regional State Administration is currently pursuing the idea of building a new coal processing plant adjacent to the Novovolynska No. 10 mine, which the Ministry of Energy and Coal Industry has also put up for privatization. The problem is that the mine has been unable to be completed. Over 1 billion UAH has already been invested in the project, but at least 0,5 billion UAH is needed to launch the first stage. Another hundred to two million UAH would be needed for the coal processing plant. Novovolynska No. 10 is the only mine in the Lviv-Volyn Basin established during the independence era. According to calculations by the relevant ministry, the first stage of the mine will be capable of producing 450 tons of coal per year, and this figure will double when it reaches full capacity. Moreover, the ash content of the local seams is quite low – less than 30%. And the reserves are sufficient to operate at full capacity for over 20 years. All that remains is to convince someone that serious investments in a long-term construction project will pay off.
Exploration by battle
The Ministry of Energy and Coal Industry's consultants from Ernst & Young and Deloitte will have to demonstrate their powers of persuasion. The government doesn't expect immediate results or final agreements. Rather, the international advisors should test the waters to determine whether there are any interested parties in the market willing to risk investing in the Ukrainian coal industry. According to Energy Minister Volodymyr Demchyshyn, if such parties are found, then the legal terms of privatization will be spelled out. In other words, Kyiv is prepared to tailor the terms to the needs of potential buyers.
"Our company has a specialized group of consultants focused on services for energy companies, and thanks to our presence in 146 countries, we have the ability to present our investment proposal to literally every potential investor," says Ernst & Young partner Bohdan Yarmolenko. "We have prepared so-called long lists of potential investors, and we intend to begin marketing the project to them in the near future." Deloitte representative Dmitry Anufriev made a similar comment. However, no one is rushing to announce the timeframe for such investment intelligence. It appears there is no strict timeframe.
In principle, even if the advisors fail to find investors, collaborating with them will not be in vain for the Ministry of Energy and Coal Industry. Seeking to make Ukrainian mines more attractive, international consultants will prepare proposals for Volodymyr Demchyshyn's desk on how to bring certain assets to break-even, or at least close to it. Essentially, each mine should have its own investment plan. The next question is who will implement it—the state or a private owner. If the experts conclude that a particular mine is beyond saving, the Ministry of Energy and Coal Industry will at least have a strong public argument in favor of the unpopular decision to close it. "We tried to pull it out of ruin," they say, "but no one's taking it, even for free."
Jaroslav Jarosz
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