“Liepajas metalurgs” on the brink of insolvency - audit report

RIGA - The financially-troubled joint stock metallurgical company “Liepajas metalurgs” (LM) is on the verge of insolvency, according to a report on the company’s finances obtained by business portalNozare.lv. The company’s management points out that if the situation does not improve or no agreement is made with the largest creditors, LM will not be able to fulfill its liabilities in April.

LM has received insolvency warning letters from the state-owned joint-stock power utility “Latvenergo.” “Latvenergo” warns that if LM does not settle its electricity debts by March 28, “Latvenergo” will request LM’s insolvency and will stop supplying electricity to LM.

“Ernst&Young” predicts that, depending on various circumstances, “Liepajas metalurgs” will lack 96.1 million lats (136.7 million euros) at the end of 2013. At the moment, LM lacks net working capital. At the end of January, the company’s working capital was negative - minus 17.5 million lats.
LM net debt commitments totaled 103.6 million lats at the end of 2012, including a loan from “UniCredit” - 51.7 million lats, “SEB banka” and “Citadele” credit lines - 22.4 million lats, a debt to “Stemcor” - 10.5 million lats, a debt to “Latvenergo” - 8 million lats.

“Liepajas metalurgs” management has requested 57.6 million lats aid from the government. The company wants the government to permit the company not to pay its electricity bills, give the company new guarantees, and pay the company’s debt to an Italian bank. The company is also asking the government that a criminal case, initiated following “Liepajas metalurgs” co-owner Kirovs Lipmans’ claim, be discontinued.

The Cabinet of Ministers has made no decision on whether to bail out LM, noting that it wants to see greater activity from the shareholders in the crisis. “It is hard to see any solution to LM’s problem when there is no clear business plan or any desire to get involved,” Finance Minister Andris Vilks (Unity) pointed out. He called “inexplicable” the idea that the government will rush to solve the company’s problems, adding albeit that “something must be done”.
Taking into account the impact of “Liepajas metalurgs” on Latvia’s economy as well as on other companies connected with the metallurgical giant, and the indirect impact it has on other industries, shutting the company down or scaling down LM operations will affect the country’s economy by 1.2 to 1.5 percent of gross domestic product, according a report on the company’s financial situation obtained by “Nozare.lv”.

The report states that LM is among the largest taxpayers in Latvia. The company paid 9.4 million lats in taxes in 2012, 0.22 percent of the country’s tax revenue.
LM operations have a considerable impact on Liepaja’s budget. In 2012, LM transferred to Liepaja’s budget funds equal to the city’s expenditures on social benefits (2.5 million lats) and utility bills of all Liepaja public institutions (1.4 million lats).

LM is the largest employer in Liepaja, constituting more than 62 percent of the city’s manufacturing output and employing 6 percent of Liepaja’s economically active residents. The total number of Liepaja residents who are involved, directly and indirectly, in LM operations is 15,000 or 39 percent of the city’s economically-active residents.
The report states that LM is also among the largest exporters and employers in Latvia. In terms of turnover, LM has been Latvia’s 13th largest company over the past two years.

As the economic situation in Europe declined last year, so did the demand for metallurgical products, and “Liepajas metalurgs” expanded exports to third countries’ markets, and almost half of the company’s output is currently exported to Algeria. Furthermore, “Liepajas metalurgs” covers the cost of transport when exporting its products to Algeria and other countries, which further reduces the company’s profitability, according to the report on the financial situation at the company obtained by Nozare.lv.

The report also notes that the price for products exported to Algeria is 356 lats per ton, compared to 366 lats per ton for products exported to other markets, mostly in the European Union, and the current market situation suggests that the prices will hardly increase.
The report says that the difference between the average price at which “Liepajas metalurgs” products are sold and the average price for raw materials, decreased by 27 lats per ton in 2012, which means that the company’s products are in fact sold for less than it costs to make them.

The report informs that “Liepajas metalurgs” signs one and two-month supply contracts as the company’s strategy is based on selling products on the spot market. Therefore “Liepajas metalurgs” has no long-term contracts, which may pose a threat to the company’s stability as the sales amounts may change any moment and huge work must be done continually to find new clients who would want to buy the company’s products.

“Liepajas metalurgs” shareholders must also participate in saving the company, President Andris Berzins told reporters after a meeting with Prime Minister Valdis Dombrovskis (Unity). “Discussing the responsibility of the state and the government, it is necessary to take into account that taxpayers’ money is at stake. It is up to the government to decide whether to channel this money for the company’s development,” emphasized the president.

Berzins believes that shareholders’ involvement should be the starting point in saving the company - either in terms of additional money from current shareholders or attracting new shareholders and their investments. Assessing the current situation in the metallurgical industry in the EU, Berzins explained that it is “very complicated,” and the industry’s overproduction (approximately 30 percent of total production volumes) is critical. “This means that European metallurgical production is not competitive in the rest of the world due to various reasons,” said the president.
“A private company, like “Liepajas metalurgs,” must primarily be rescued by shareholders, not the government.

Shareholders must be prepared to pump their capital into the company or attract other investors. If we do not see such things taking place, then the government must itself be very careful. The company’s shareholders must act, instead of delaying and leaving all the responsibility to the state,” Economy Minister Daniels Pavluts told the business information portal Nozare.lv.

The largest shareholders of “Liepajas metalurgs” - Sergejs Zaharjins and Ilja Segals, have spent the past few days in Istanbul, London and Milan in order to discuss investor attraction to “Liepajas metalurgs”, according to the company’s statement to the mass media.

According to the statement, “Liepajas metalurgs” is disappointed by the government’s session of March 26, when no decision was made on supporting the company during the “difficult situation in Europe’s metallurgical industry.”