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whisper

By John Helmer, Moscow

Fibber McGee was one of the first situation comedy serials on American radio; from 1935 to 1959, it was also one of the longest running. The situation joke was that Fibber would tell tall tales which his wife Molly would expose. Fibber (left image-1) stood (and fell) for hare-brained schemes; Molly, his wife on stage and off (left image-2), stood for commonsense.

Evraz is one of Russia’s largest steel and mining companies employing about 110,000 people worldwide. In Russia the group operates three steelmills in two regions; ten coalmines in two other regions, five iron-ore mines, and two vanadium refineries near Moscow. It is controlled by Roman Abramovich (right image-1), whose way of telling tales managed to persuade the UK High Court judge Dame Elizabeth Gloster, in the well-known case brought by the late Boris Berezovsky. But no Molly, Gloster. She decided that to protect her judgement from the Court of Appeal, she believed one of the two claimants rather than dismissing both of them for lying their heads off. A good part of Russia was wise to what was true, what was false. Gloster did something else. “I bethcha!”, one of Molly’s famous lines, turned out to be Gloster’s in the end. Or, as the Greek character used to refer to their names in the radio show, it was a case of “Fizzer and Kewpie”.

But real life must go on, at least in Russia, and making steel is a necessity. According to the latest financial information released on August 28, Evraz is selling less goods than it used to; its operating profit is down on a year ago by 58%; its net profit number is $122 million in the red. Its gross debt amounted to $8.2 billion on June 30, up by almost 5% since December 31. That makes Abramovich the second biggest steel debtor in Russia, trailing Igor Zyuzin of Mechel, who is in the hole for $9.3 billion (March 31).

For months now Evraz has been saying that in order to get its books in order, cut its recurring costs and losses, and reduce its aggregate debt, it plans to sell its South African steel and vanadium property, Highveld Steel & Vanadium, and its Czech business, Vitkovice Steel. According to the company’s annual report for 2012, the plan has been “to sell [them] in 2013”. Only so far it cannot, at least not at the $930 million asset value Evraz has been claiming (asset liabilities $478 million).

One reason, which has been reported here in detail, is that the $320 million price purportedly offered for Highveld by a South African group associated with the president of that country cannot be financed by a bank.

Another reason is that noone has surfaced to offer any price for Vitkovice. Production has been stopped instead.

So what to make of Evraz’s latest announcement that it intends to shut down Russian steel and mine production? According to an announcement last week by Marat Atnashev, the group is thinking of cutting production at its Russian mills and mines. Atnashev is titled the company’s vice president for the iron-ore division and major projects; he doesn’t usually speak about steel. The company’s press spokesman Tatiana Drachuk has left her job, and moved elsewhere. Atnashev won’t answer requests to clarify his remarks, and Drachuk’s successors at the press office are cutting their own costs by not picking up their telephones or responding to emails.

Atnashev revealed for the first time that in July Evraz had halted steel plate production at the West Siberian (Zapsib) plant at Novokuznetsk city, in the Kemerovo region of Siberia. This wasn’t the picture if you relied on the company’s press releases. The only announced steel shutdown in July was at the group’s plate-rolling mill located in San Giorgio di Nogaro, in the Italian province of Udine, part of its Palini e Bertoli operations. In its July 30 announcement Evraz claimed the Italian production halt would last for at least three months, and that in the interval new orders from the Palini e Bertoli mills would be redirected to other Evraz units.

A Russian press leak had appeared on April 23 indicating that Evraz had made up its mind to close down the steel plate production line at Zapsib by June 1 because the cost of producing this product was too high, compared to newer production lines in western Russia. This leak cited another leak in a regional press source. But the company was officially silent. Nothing was disclosed to the London Stock Exchange where Evraz trades its shares on the exchange’s main board.

The company production and sales reports in August showed that production of flat-rolled steel in the first and second quarters of this year was stable between 642,000 tonnes and 643,000 tonnes, virtually unchanged on the previous year. But sales of flat-rolled steel products saw the biggest of the sales revenue declines in the first half, compared to other products in the Evraz portfolio; they came to $1 billion, down 17.7% on the year. Evraz doesn’t release a breakdown of the quarterly financial results for its Russian and non-Russian divisions, but a fair guess from other data is that the Russian mills remain profitable, subsidizing the losses posted by Evraz mills elsewhere.

Atnashev has repeated earlier company announcements of sales of coal and iron-ore mines. “We understand that the most likely to be closed will be sites where there is inefficient production”, Atnashev is quoted as saying last week, “or maybe reduction of production volumes at them… The total cost of production this year will be reduced by 12%-13 %.”

In January Evraz had announced the plan to close its Irba (Irbinsky) iron-ore mine by July 1, and in September it reported the sale of the Vysokogorsky iron-ore mine. The former in Krasnoyarsk region was loss-making, and its reserves close to depletion; the latter, in Sverdlovsk region, near Nizhny Tagil, was sold for $20 million, with a promise to add Rb400m ($12.5 million) in working capital. When the Vysokogorsky sale was announced last month, Atnashev was quoted in the company announcement as claiming the disposal was “in line with EVRAZ’s strategy in mining, whereby we continue to focus our efforts on large scale and low cost operations supporting the efficient vertical integration of the company. VGOK has become a non-core asset for the group, as the iron ore requirements of EVRAZ NTMK [Nizhny Tagil] are fully met by cheaper supplies from EVRAZ KGOK, while the output of VGOK can be re-directed to the Urals’ regional market.”

Boris Krasnojenov, the steel analyst at Renaissance Capital in Moscow, said that full closedown of Russian steel production lines is difficult for many reasons. “I would say the probability is of a certain reduction in steel output, the closure of one production line at Zapsib, and something may be closed at Nizhny Tagil – up to a million tonnes of production line capacity. I do not think we are talking about closing [Russian] assets. Speaking of Russia, [the announcement] was a signal to the state or the market that if the situation continues to get worse — we are now entering the winter season, plus industrial production is not growing; and there is no demand for exports – so it could lead to closing capacity.”

Does this mean that Evraz is bluffing with regional and federal government officials, threatening by press leak, without telling shareholders because the company’s intentions are obscure, not to say concealed?

Oleg Petropavlovskiy, a metals and mining analyst at BCS Financial Group in Moscow, says that Atnashev’s shutdown and sale targets are “for the most part at [mining subsidiary] Evraz Ruda, where they conduct underground mining of iron ore, and maybe some other mines. But they do not reveal exactly which ones and what is the cost of production there. But based on the average cost they have disclosed of $80 per tonne, some mines are unprofitable at current prices.”

According to Andrei Shenk of InvestCafe, Evraz can “focus on more profitable product by redistribution [of production capacities] to different product lines…they can dismantle [one production line] and put in a new one. Basically, we are talking about steel products, it’s not steelmaking. Therefore, there they can install something else.”

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