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By John Helmer in Moscow

Evraz, the most heavily indebted of Russian steelmakers, is signaling that it is about to sell a US subsidiary producing the valuable steel alloy ingredient, vanadium. But the signs are that there is no intention on the part of the controlling shareholders of Evraz – Roman Abramovich, Eugene Shvidler, and Alexander Abramov – to toss the vanadium baby out with the bathwater. The idea apparently is to take the company off the Evraz books, making the profit and loss accounts look better for banks and share markets, but keeping control of the vanadium by selling the company to a shareholder – for the time being.

Despite an improvement in vanadium production and sales in the first half of this year, Evraz has reported this month that it is offering to sell its Connecticut and Arkansas-based vanadium producer, Strategic Minerals Corporation (Stratcor). A further announcement on the sale is expected to be made in October, an Evraz source told CRU Steel News.

Stratcor, one of the largest producers of vanadium alloys and chemicals in the world, was first acquired by Evraz in April 2006 when it paid $110 million to buy a 73% stake of the company; the remainder of the shares were held by the Japanese trading company, Sojitz. At the time, Evraz said it wanted to “benefit from Stratcor’s advanced technical know-how and outstanding marketing expertise” (see CRU Steel News, 12 April, 2006).

The offer to sell comes after Evraz reported on September 2 that it has taken a $17 million impairment charge on the current value of Stratcor’s assets. Earlier, in the company’s annual report for 2009, Evraz disclosed that it had reduced the value of Stratcor’s goodwill to $39 million from $47 million in 2007. It has also written down the value of Stratcor’s plant and equipment by $8 million.

Evraz’s financial reports do not identify Stratcor’s operating performance, nor whether it is making profits or losses. The Evraz sales and earnings reports for the vanadium segment group Stratcor with parallel vanadium operations in Russia, South Africa, and Europe.

According to Evraz’s latest financial report, vanadium segment sales jumped by 110.1% to $290 million in the first six months of 2010, compared with $138 million in the first six months of 2009, reflecting increased sales volumes and improvement in the prices of vanadium products. Earnings were reported at $63 million. None of these numbers a big impression on the group’s total revenue and earnings accounts. They indicate that for the first half of this year, vanadium made up just 2.5% of total Evraz revenues; 5% of earnings. If there was a financial problem at Stratcor, these percentages suggest it must be a minuscule one.

Sales volumes for the vanadium division increased from 7,400 tonnes of pure vanadium in the six months ending 30 June 2009 to 10,900 tonnes of pure vanadium in the six months ended 30 June 2010. Other vanadium producing units held by the Evraz group include the newly acquired Vanady-Tula in Russia.

According to the annual report, Evraz’s vanadium strategy this year included “increasing market share of high value vanadium products to chemical and titanium / aerospace industries via Evraz Strategic Minerals Corporation’s operation in North America.” Since this was released on July 23, and there was no sign at that date of Evraz’s intention to sell Stratcor, it looks like the decision to find a buyer for Stratcor was reached within the past six weeks – between July 23, when things were looking up for Stratcor; and September 2, when things were looking down.

What is puzzling about the latest Evraz disclosure is that the company claims the decision to sell Stratcor had already been taken much earlier: “in January 2010, the Board of Directors approved the plan to sell Stratcor, Inc., a North-American division of Strategic Minerals Corporation…The subsidiary is actively marketed and it is expected that it will be sold within one year from the reporting date.”

In fact, sources close to the company suggest, the transaction is due to be approved by the shareholders next month, and an announcement is expected then. The deal, suggest these sources, is “not a material disposal” for the group. Does that mean the sale isn’t a big one? Or that it isn’t a disposal for the group? Here is the hint that the baby isn’t going out with the bathwater. So why all this rigmarole?

One possibility is that Stratcor has been a lossmaker, and it is being removed from the Evraz books to make the bottom-line look better. A similar accounting stratagem was recently arranged by Alexei Mordashov, controlling shareholder of the Severstal steel group, when the company sold its lossmaking and indebted Lucchini group of steelmills, and Mordashov bought them. But in terms of size, debt, and losses, the Lucchini transfer dwarfs the Stratcor one.

The other possibility is that Stratcor isn’t a lossmaker at all — that someone close to Evraz would like it for himself. The selling price won’t be announced until the sale and the buyer are revealed. Until then one thing seems sure – after the writedowns recorded, Stratcor is being sold for very much less than Evraz paid for it.

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