Evraz - A Detailed Look at a Complex Business

Here we provide a comprehensive overview of Evraz's Russian operations. We conclude that the prospects for coking coal volume growth depend on export markets and a recovery in the SSCC spot price to above $80-85/tonne FOB Australia. For the steel division, most of the HVA capacity is utilized, while a reduction in the share of semis is subject to the investment program being realized. There are projects in the pipeline ready to be constructed, but the weak domestic market appears to be forestalling this. Over 2021-23, we model at least 1 mln tonnes of additional finished long products being produced. Assuming a modest recovery in coal and steel prices and accounting for some cost-cutting initiatives, we expect EBITDA to grow above $2.3 bln in 2021 versus $1.8 bln in 2020. We reiterate our BUY. > We decided to move away from both the Russian and international grading systems for coal and instead base our analysis purely on market prices. We don't expect Evraz's coal investment program to result in higher average realized prices (the mix will remain about the same), but it should help increase self-sufficiency in certain grades and export volumes. However, given Evraz's high transportation costs and the discounts its coals trade at versus HCC Australia, boosting exports will depend on global prices. We model modestly higher coal prices in the coming years and expect the coal division's mining output to climb to 27 mln tonnes in 2022, with its EBITDA rising to $600 mln. Longer-term, the resource base should allow Evraz to keep adding another 2-3 mln tonnes. > While Evraz is running at full capacity in steelmaking and probably close to that for HVA long products, which are sold primarily in the domestic market, it has to send much of its semis output abroad so as not to oversupply the highly competitive Russian market with commodity-like long products. Thanks to the low integrated cash cost of its steelmaking operations, Evraz is profitable in export markets, though its EBITDA margin is much higher in the Russian HVA market.> Evraz's investment strategy involves HVA capacity expansion to converting semis to around 0.4 mtpa of long product at a reasonable level of capex; we expect this to be done by 2022. Evraz is also considering construction of 2.5 mtpa of HRC capacity to replace semis, albeit for a rather high cost of $650 mln. The project has been delayed a few times already and would probably require stronger demand in the target market of eastern Russia.> Assuming a recovery in SSCC to $95-100/tonne and 5-10% higher steel prices, and some cost-cutting, we model 2021 EBITDA at $2.3 bln, 20% above the consensus and 30% above our 2020 forecast. We value the company at a target 10% 12-month-forward FCF yield, which is above the pre-pandemic 7-9%. This reflects the risks of still-fragile end-demand for coal and steel outside of China and Evraz's high macro sensitivity given its operating leverage. We derive a $6.9 bln target equity value, or $4.70 (GBP3.74) per share. We reiterate our BUY.