Email This Post - Print This Post Print This Post

Oligarchs put hand in till

By John Helmer in Moscow.

It is a time of extreme paradox. In Soviet style, the US Government is nationalizing its financial instututions to stave off massive default. The Russian Government, by contrast, is encouraging free-market operations to prop up the indebtedness of the oligarchs, while the Finance Ministry, having been embarrassed holding worthless Fannie Mae paper, is now proposing to invest the sovereign wealth fund in depreciating oligarch securities.

A Financial Times reporter close to Oleg Deripaska, owner of Rusal, the Russian aluminium conglomerate, reported this week that he is “facing margin calls of more than $4bn, people familiar with the situation say.” This is a reference to the financing Deripaska raised in the spring to pay part of the purchase price of Mikhail Prokhorov’s 25% shareholding in Norilsk Nickel. Also this week, Deripaska’s Moscow holding is reported as telling Reuters that it will shortly launch a China roadshow to put an improved value on the group’s mining assets. The roadshow is scheduled to follow a Hong Kong tour by the Bolshoi Theatre ballet company, sponsored by Deripaska.

The reports have suggested that if the Chinese market reaction is positive, and the price is right, Deripaska’s Strikeforce Mining and Resources (SMR) may attempt to place shares on the Hong Kong exchange. SMR mines copper-molybdenum deposits at two sites in Siberia, with capacity to lift and process 13 million tonnes of ore per annum. Two refineries in the production chain can produce up to 7,000 tonnes of ferromolybdenum per annum. The price of ferromolybdenum has been dropping, though not yet as steeply as the price of steel and aluminium.

In April, Strikeforce announced that it had pulled out of the bidding for the Serbian copper mining complex RTB Bor, after failing to agree with the Serbian privatization agency on price and investment terms.

Metal analysts report that volatile aluminium and other metal prices make estimating Deripaska’s net position difficult. They note that his partners, with shareholding stakes in Rusal and other Deripaska assets, may be applying pressure on him to limit their risk of big losses in their Rusal merger contracts. These partners include Victor Vekselberg, Mikhail Prokhorov, and Glencore, who are stakeholders in the unlisted Rusal; as well as Mikhail Chernoy (Michael Cherney), Sergei Popov, and Zhanna Malevskaya, widow of Anton Malevsky, who have been identified in the UK High Court as silent partners in the original Rusal and its predecessor and associated companies. Chernoy’s current London litigation claim, plus those of Popov, Malevskaya, and others, whose positions have been evidenced in the High Court case, plus the minority Rusal stakeholders, appear to add up to more than $25 billion.

In Russian steel, the financial pressure on the major proprietors is not less visible.

In an effort to prop up the share value of Severstal, the third-ranked Russian steelmaker, the company announced yesterday that it will spend about $400 million in cash to buy up to 3% of the one billion shares on issue. Alexei Mordashov, the Severstal group chairman, owns almost 83% of the shares; 17% are held by institutions and company employees. The company announcement has followed the decline of Severstal’s share price by 47% over the past three months. Severstal’s capital value is now $13 billion. At peak in mid-May, it was worth $28 billion.

This is not the steepest fall in market value of the major Russian steelmakers in the same period. As of close of trading on Tuesday, when the aggregate Russian indexes fell by up to 17% on the day, Mechel’s decline over the same period has been 61%; this followed attacks by Russian Prime Minister Vladimir Putin and the opening of price-rigging and tax evasion investigations in August. Novolipetsk Steel, owned by Vladimir Lisin, has dropped 54%; Evraz, controlled by the Roman Abramovich group, 52%; and Magnitogorsk Metallurgical Combine (MMK), owned by Victor Rashnikov, by 45%. The pipemaking TMK group, controlled by Dmitry Pumpyansky, has fallen less steeply, by 27% over the past three months.

According to Tuesday’s announcement in Moscow, Severstal will purchase shares and GDRs on the open market over the next 6 to 10 months. The shares will be held by one of Severstal’s subsidiaries. The price of the buyback will depend on market conditions and the trading price of Severstal’s shares and GDRs. A stock brokerage in Moscow commented that “we welcome Severstal’s decision to support its shares, which have fallen by 50% over the past 3 months due to the ongoing selloff on the Russian market.”

The Severstal proposal has targeted 28.22 million shares in the free float. These were worth $400 million at the opening of Tuesday trading, and $347 million at the close. Rob Edwards, steel analyst for Renaissance Capital, reports that “we assume that up to 16% of the free float may be bought and either cancelled or held as treasury. Other Russian steel companies have considered share buybacks but have preferred to retain their relatively small floats in institutional hands, invest cash into projects and potentially engage in opportunistic merger and acquisition activity as asset values enter a period of extreme volatility.”

Edwards claims “the method of open market stock buyback is a relatively new concept in Russia and is refreshingly transparent, unlike at some other Russian companies where shareholders have to apply to have shares bought back, a method that has tended to favour core shareholders.”

MMK is also reported as saying it may consider a buyback of its shares, but no official action has been taken by Rashnikov yet.

A report by the Finam Investment Company of Moscow is skeptical of Mordashov’s buyback move. “One goal pursued by the company in this strategy may be its intention to prop up its executive incentive program. It is customary with corporations to buy back shares with a view to avoid the dilution of their shareholder value in implementing option programs for their top managers. The shares bought back are then accumulated as treasury stock, which may be used to meet the needs of managers under option programs. In our view, the buyback of shares at a time when they are undervalued on the market will play into the hand of both option holders and the company’s owners.”

In the buyback announcement, Severstal’s chief financial officer Sergei Kuznetsov was cited as saying: ”Today’s announcement underlines our confidence in the value of our own business.”

The sharpness of the Russian downturn, despite indicators of continuing, though slowing, growth and demand for steel, is caused primarily by the global decline in oil and commodity prices, and the rising cost of credit. Forced selling on margin calls and fund redemptions have been driving Russian share prices downward, accelerated by fears that if oil will drop through the $70 per barrel level — a critical threshold fixed in the government’s 2009 budget — this will trigger unpredictable changes in the current economic and growth forecasts.

Press reports have speculated that the major Russian companies have leveraged heavily to buy assets abroad, thereby hedging their risk of a downturn in Russian profitability and government intervention of the type that has already reduced the financial prospects of Mechel’s and Evraz’s coal-mining divisions. They have secured part of this debt by shares, which have now breached their collateral value. The debt positions of the proprietors are also reportedly under pressure from the same combination of falling collateral value, rising debt charges, and declining revenue and profit projections.

The Russian Trading System (RTS) is now back at a level last seen in December 2005, when the country’s GDP (in US dollar terms) was half of what it is today, when oil averaged $52 per barrel (it is averaging $108/bbl this year to date), and the Russian Central Bank’s reserves were only $182 billion, one-third of the current level.

A report just issued by Renaissance Capital on pipemaker TMK has tried to tie the projection of rising share value for TMK to confidence in the stability of the current oil price. “We sense that the market is inclined to discount the certainty of delivery of new TMK capacity until it is de-risked and delivered”, reports analyst Edwards. “Another material short-term driver is the weaker oil price (33% off its peak). In the meantime, Tenaris and TMK have dropped 44% and 46%, respectively, from their highs. However, we believe that TMK will deliver substantial outperformance, the oil price and market confidence permitting.”

Leave a Reply