Email This Post - Print This Post Print This Post

By John Helmer in Moscow

Poor performance and uncertain prospects dog Russian steel and mining magnate Mordashov and management reshuffle not seen as improving the situation.

Severstal, Russia’s third ranked steelmaker, is far from the Titanic, but seat-changing at the steel and mining group has failed to convince steel industry observers and the Moscow stock market that the downward trend of its stock price can be reversed.

So far this month Severstal’s share price has lost almost 7%, the worst performer among its Russian peers. On Monday, it lost 0.4%, following a company reorganization announcement. The share price continued downward on Tuesday, then flattened in midweek trading.

The company announcement claimed that a “new structure, taking effect in April, will reduce the number of reporting lines between individual operations and senior management, ensuring greater operating efficiency and capitalizing on Severstal’s international diversity by providing for the continued growth of the global business.”

Three new divisions are being established. These are: Severstal Russian Steel – to include the following segments: steel, pipe, metalware and services as well as scrap procurement operations. Anatoly Kruchinin, currently CEO of Cherepovets Steel Mill, has been appointed as CEO of Severstal Russian Steel. Severstal Resources will сomprise Severstal’s assets relating to iron ore, coal and gold extraction. The division includes mining and gold-mining segments. It is one of Russia’s largest producers of pellets and coking coal. Roman Deniskin will remain CEO of the division. Severstal International – a newly established division, comprising European (Lucchini Group) and North American (Severstal North America (SNA) and SeverCorr) segments. Gregory Mason, Corporate COO of OAO Severstal, has been named CEO of the division.

The executives in charge are not new to the company. Nor will the new divisional structure take effect in accounting terms until 2009. This year’s financial reports for Severstal will follow last year’s organizational divisions.

The market reaction was immediately sceptical of the claim by Alexei Mordashov, who controls 82% of the group’s shares, that “the simplified, more focused structure will serve to improve our competitiveness, increase production, cut costs and maximise profit.”

One observer noted that the weak performance of Mordashov’s North American assets — the former Rouge steel mill in Michigan, SeverCorr in Mississippi, and Sparrows Point, Maryland — may be camouflaged by consolidation in the newly created international division.

“An investment in Severstal is also a bet on Severstal’s ability to do what the rest of the steel industry is avoiding: manufacturing primary steel in the US and Europe,” reports Michael Kavanagh, steel analyst with UralSib Bank in Moscow. “Severstal has a poor record of shareholder value creation, with its acquisition of – and subsequent failure to improve – underperforming assets.”

One seat in Mordashov’s new structure remains exactly where it was, occupied as before — and that is a surprise to the market. Kevin Foo, formerly chief executive of London-listed junior Celtic Resources, remains where he was, four months after Mordashov’s mining division bought out his company. After bickering over a 7% share price premium between October and December last, Mordashov completed the Foo buyout, and delisted Celtic from the Alternative Investment Market in London on January 22.

A spokesman for Severstal Resources told Mineweb this week that Foo remains employed by the Severstal group. “It is as yet inappropriate,” he said, “to comment on how and when we will make management changes. The decision on this or another way has not yet come down.” Foo was at work in Kazakhstan last week.

It is highly unusual for a Russian takeover operator like Mordashov to fail to put his own men in place after an asset acquisition has been completed. But Severstal’s mining division has been struggling to prove itself under Mordashov management, and he could do worse, market analysts say, than leave the Celtic gold, molybdenum and copper mining assets in Kazakhstan in Foo’s hands.

Another reason to leave Foo where he is for the moment is that Mordashov’s gold mining strategy is far from clear, and far from confident. In adding gold to his coal and iron-ore portfolio, Mordashov has followed most of the other Russian oligarchs into a commodity, which is viewed as easy as a mint. For Mordashov and his peers, low-cost entry acquisitions can generate handy capital gains and share price multiples on the back of the gold price, without the cost, skill, or risk of investing in mining as such.

But, at the same time, Mordashov has demonstrably lacked the political influence with the Kremlin, or with the gold regions of Russia, to capture the most desirable Russian gold assets that remain unclaimed, and position himself for a shot at winning the Sukhoi Log deposit, Russia’s richest unmined gold deposit.

That was confiscated from Australian junior, Star Mining, in 1997, and the licence has not been re-awarded yet. If the recent Kremlin decision to avoid auctions and price-raising tenders to award strategic mineral and oil deposits to pre-selected candidates is followed with Sukhoi Log, Mordashov isn’t in the running.

No surprise then that, at the same time as he was announcing the divisional seat-change this week, Deniskin, Mordashov’s head of mining, said the Severstal Resources division may go after new assets in Africa. Iron-ore, Deniskin suggested — without explaining what the corporate rationale may be.

According to Kavanagh of UralSib, a “prime example” of how not to run a mining business is Severstal’s mining division. “Severstal bought the assets from Alexei Mordashov for $4.8 bln in 2006,issuing 398 mln new Severstal shares at a price of $12/share. Despite rising commodity prices, in 2007 the mining assets made a net profit of just $161 mln, a return on investment of just 3%. If one strips out the results of the mining business and the shares issued to acquire it, Severstal’s EPS in 2007 would have been $2.92/share, which is 52% higher than the $1.92/share reported in 2007.”

Leave a Reply