Czech energy giant plans further growth in USA

Prague/Bratislava, 24.6.2022                            Link to the original article

Hospodárské noviny were the first to report that Pavel Tykač's Sev.en Energy together with the Hungarian MOL are in the proces of buying the U. S. Steel Košice steelworks. Is it true?

I understand why you ask. We also read in the media that we are one of those interested in the U. S. Steel Košice steelworks. Unfortunately, I will disappoint you, as I cannot comment on such information in either direction. In principle, we make no comments on potential transactions, whether we are in them or not.

So let me put it in a different way. You are a large producer of electricity and metallurgical coal used in the production of steel. Would it make sense for you to buy a factory with products of a similar nature with these inputs within the vertical?

We are a group that is eager to invest and grow. Geographically, in addition to the Czech Republic, we operate in the USA, Australia and the United Kingdom. Until recently, we also operated in Canada, but we sold the mining company there with a significant profit. However, we also want to grow in other sectors. We are currently the largest private producer of electricity in the Czech Republic, in addition to being fully vertically integrated with domestic coal mining. We have a similar position in Australia, where we use coal from our own local mines to generate electricity. We are also present in the United Kingdom, where we own four gas-fired power plants. It is true that we are interested in expanding within sectors. This also applies to mining. An example is our purchase of the second largest metallurgical coal miner in the USA, Blackhawk Mining. This company supplies metallurgical coal all over the world and makes us very happy due to the growing profitability. So we have a wide scope and we are also looking at other related areas. It can be in petrochemicals, steel, mining of other minerals or other sectors.

Coal will not be here forever. Are you also planning to expand mining activities into the area of “green“ minerals?

There are investors who are fleeing traditional minerals and concentrating, often at an unreasonable price, on the mining of the “green” materials and minerals. A good example are materials for the production of batteries.

We are not afraid to stick to traditional minerals. They still make sense, and it has been proven many times that they are needed. Departure from them will have to be very thoughtful. You cannot just throw them overboard. And in the same bag one could put steel industry, petrochemicals, aluminium plants and other industries.

Slovalco is considering stopping production in Slovakia and there are other large companies in Europe that have found themselves in trouble. Are you also considering buying such businesses?

Aluminium production is extremely energy intensive. It depends on how resolved the electricity supply is and how ultimately it is competitive. However, aluminium factories also get a tailcoat because this production is not as pure as someone might want it to be. Therefore, capital is partially withdrawn from these sectors. We are currently looking at one such potential acquisition in America.

You are the second largest producer of metallurgical coal in the USA. You plan to be number one. Is it realistic?

In the USA, the steel sector has consolidated. This led to the search for ways in the field of efficiency, portfolio and justified a consolidation of the mining of metallurgical coal. We would probably be further in this area if the shocks that we have experienced here recently have not occurred. After the pandemic and economic recovery, and after the start of the war in Ukraine, the prices of this commodity shot up by hundreds of percent. It is therefore not even wise to buy more companies at a time of historical profitability. The plan itself holds, but current market volatility does not help us.

Who is your primary customer in the USA? Is it the mother of Košice steel mills?

In the USA, a significant part of our local production is taken by U.S. Steel. But we also supply other steel producers in America.

Yes, but it has nothing to do with the questions you asked me at the beginning. The truth is that U.S. Steel Košice, through its American mother, buys coal from our American mines to see if this type can be an alternative to existing supplies from Ukraine.

Steelmakers are experiencing a period of huge profits. At the same time, however, they claim that production input prices are also growing enormously. What is the development of metallurgical coal price?

If you asked me a month ago, I would say it is at an all-time high. Now the steel segment is slowly weakening. The reason is weakening demand. This is also felt in the prices. However, the truth is that the price level is still much higher than in the past.

The steelmakers themselves claim that the market will cool down. Do you expect the same scenario in the metallurgical coal markets?

We are moderate optimists. However, we do not expect today's price to last forever. We are sure it will go down. It will all depend on the demand and supply of steel, which is the world's primary consumer of this commodity. It is one of the sectors where we would like to invest.

In the USA, you focus mainly on metallurgical coal. Have you already considered expanding to thermal coal and producing electricity from it as you do in Czechia?

The truth is, we got to the USA after we were considering buying coal-fired power plants there. It was not clear how the industry would develop. The local market is not unified. It is divided into several regions and some of them are based on market principles, while others are significantly regulated. In addition, there is pressure to shut down similar technologies. We were afraid that we could not read the situation enough. However, it is true that we are currently starting to look again at power plants and also at the mining of thermal coal. We are currently negotiating several specific opportunities in those sectors.

Yes, if we look at this market, we can say that it is the world's cradle of coal. This energy is extremely important, because the local market is highly dependent on it. That is a reason why we want to significantly strengthen our presence in Australia.

You reached loss in 2020, and historical profit in 2021. In layman's terms, has the energy market crisis helped you?

The whole thing looks like it is a crisis that no one expected. However, I must say that it has come together with a combination of the fact that we are still willing to bet that these traditional industries make sense. Some expect that all our power will come only from the sun and wind, and that is not possible. Events around the world have shown that the problem is much deeper. The policy of green electricity was based on cheap Russian gas, which turned out to be a total nonsense. In other words, we see that the world cannot do without traditional energy, and we must look at the problem mainly systematically, not activistically.

Some claim that coal producers are the winners of today. Emission allowances increase their costs, but factories produce goods with technologies from past centuries without the need for large investments. What is your opinion on this?

In principle, I do not agree that this is a sector without investment. At a time when markets were not where they are today, we had to decide on significant investments in our portfolio. European legislation is strict and emission allowances are also extremely burdensome. In addition, from every megawatt hour we produce, we hand over 80 to 90 euros to the state. This makes us by far the largest contributor to the state budget. And these resources are then used for ecologization and further development in many ways. Many activists are not aware of these facts at all, or simply do not want to listen to them.

You are the second largest producer of electricity in the Czech Republic with a market share of 13 percent. Is it possible to grow further?

We have grown in recent years. In the Czech Republic, we completed two transactions related to production resources. Two years ago, we bought two sources producing electricity and heat from the Swiss company Alpiq. Last year, we took over the Počerady coal source from ČEZ in advance. This significantly helped us to connect our mining capacities with electricity production with full self-sufficiency of primary sources.

How are you doing with your coal reserves? Can you say how many more years do you have left?

In the Czech Republic, we mine coal in two locations. The volume of raw material that can still be extracted is definitely higher than the future use we estimate. And in America, we have reserves of metallurgical coal for decades.

I was interested in the fact that the Chvaletice power plant produced three million megawatt-hours of energy in 2013, and last year it was more than 10.3 million. What is the cause?

The growth was due to several factors. Firstly, we have invested in development and modernization. Also because ČEZ used the power plant mainly for support services, and therefore the technologies did not go at full capacity. Moreover, at current energy prices, it is logical for us to make the most of these capacities. Don't forget the fact that we are a privately owned group and we are flexible because we do not have as huge internal processes as any multinational corporation.

Do you plan to develop in the field of renewable energy production as well?

I can imagine that in the future, technologies such as biomass burning, batteries and the like could be added to traditional energy production. You can think of it as a car with a plug-in hybrid engine. If possible, it goes on the battery, if it does not catch up, the internal combustion engine will start. Coincidentally, we are probably the furthest in the UK in the development of high-capacity batteries. There will be two of the largest battery farms in Europe, each with an installed capacity of 300 megawatts. This makes us the number one player in battery storage. I would be willing to bet on this system that it will be the main technology that will really help transform energy from conventional sources to green ones.

You operate four steam power plants in United Kingom. How did you cope with the energy crisis and the rising price of gas there?

The spread between fuel and the selling price of electricity was widening, so the situation was increasingly advantageous for us. The reason was the same as elsewhere - the lack of available resources for electricity generation. UK was the first to shut down coal-fired power plants, and it is also phasing-out nuclear power, which still had major operational problems. The result was the premature shutdown of some reactors, which eventually brought the country to the brink of an energy crisis. I am curious how the winter will turn out this year. It can be seen in every market that a premature departure from traditional energy sources causes unexpected situations.

The same story takes place in Australia. Pressure on green resources has caused network instability. At the same time, the local market is facing other problems that no one expected. After rising world prices, it did not pay off for domestic coal and gas miners to supply local energy producers. Producers therefore sold on the world market, from where energy producers bought it at much higher prices. This has resulted in a situation where while in the past prices have been at around A$40, they have recently reached more than A$600. Subsequently, the regulator intervened and set the price at A$300. However, there were producers for which it did not pay off to produce at such prices. Therefore, they withdrew and threatened a blackout. Therefore, the regulator repealed what it ordered and instead introduced a production obligation, compensating energy prices and at the same time starting to regulate consumption. And these are absolutely unprecedented measures for Australia, which have probably never happened there before. Here, too, we can see what happens when someone pushes for change too quickly.

A number of energy-intensive producers claim that the energy market has no self-regulation and that regulatory intervention is necessary. What is your view on this?

They tried it in Australia and it turned out to be disastrous. It cannot be said that one factor is to blame for the whole situation. The aforementioned recovery after the pandemic caused market pressure. A number of sectors have been subdued and the situation has turned out of nowhere. The war in Ukraine came on top of this. So it is debatable what the regulator’s role is. The situation is far from being caused by only one factor. For example, logistics has been and still is a problem. The market would certainly benefit from more coal, but producers cannot get it to world markets. Bottle necks in international transport and regulations must be unblocked. Only then can we return to stability.

The situation remains dynamic due to various factors. What are your expectations from this year?

Overall, Sev.en Group produces more electricity than the consumption of Slovakia. We will extract approximately nine million tons of thermal coal on the Czech market and eight million tons of metallurgical coal abroad. In addition, this year our foreign businesses will outgrow the domestic business for the first time. We are aiming for an operating profit before tax of €800 million abroad, and in the Czech Republic it should be €700 million. In total, the Sev.en Group expects a profit of approximately €1.5 billion in 2022.

Mr. Svoboda has obtained Master's degrees in Economics at the University of Missouri, USA and in Applied Sciences at the University of West Bohemia, Czechia. Until 2004, he was a partner at McKinsey & Company, an international management consulting firm where he specialized in utilities, oil and gas sectors. Until 2014, he was a member of the Board of Directors and the Executive Director for Trade and Trading at ČEZ. From 2015 to 2016, he consulted on technological and innovative startups in the field of energy, petrochemistry and recycling. Since 2017, he has been Executive Director of Sev.en Group - a family office investment group investing in mining, energy, gas, steel and other traditional industries.