By John Helmer in Moscow
The Russian government has become the first in the world to tell billionaire industrialist Lakshmi Mittal to take his cash and his steel mills elsewhere.
India’s and England’s richest individual, and the world’s largest steelmaker, Lakshmi Mittal has been suffering from a defect of hearing, apparently not understanding the message, when it had been passed discreetly.
Then on Friday morning, following the auction of almost 4 billion tonnes of Russian coal assets, from which Mittal had been disqualified, a minor state property official announced that the government will take five days before sending Mittal a letter, explaining the reasons for his exclusion.
Mittal is not the only powerful Indian figure in Russia to suffer from the painful syndrome, when vanity blocks the aural passages, and wishful thinking causes frontal-lobe distortions in impulse control and judgment.
A series of recent Indian ambassadors to Moscow and ministers in Delhi, not to mention the Congress Party and Gandhi family treasurers, have all believed in the prospect of their taking a share in Russia’s resource wealth. But after establishing a modest representative office in Moscow in 2003, Mittal, his brothers, and son have been repeatedly advised to remain where they are, across the border in Kazakhstan and Ukraine, and not to imagine they will be allowed to move north; except for social visits, and even those have been limited.
President Vladimir Putin has rejected several overtures from Lakshmi, and refused to receive him in Moscow. There have also been clashes of personal interest with individual Russian steelmakers like Alisher Usmanov (Urals Steel) and Alexei Mordashov (Severstal), whom Lakshmi found easy to outwit, and whose frontal lobes have been burning with thoughts of vengeance ever since. On the other hand, Lakshmi’s son Aditya has been the welcome guest of Victor Rashnikov (Magnitogorsk).
Most recently, the welcome has been extended by Vyacheslav Shtirov, President of the far eastern region of Sakha (Yakutia), and by Sergei Vybornov, Chief Executive of Alrosa, the Sakha region’s dominant enterprise, and the world’s second largest diamond miner. According to the Russian media, the Mittals recently offered them a number of promises they could not resist, causing them to forget their obligation to ask the Kremlin’s permission. Their embarrassment at the outcome of their short-lived Mittal partnership is almost as painful, at this moment, as Lakshmi’s for having believed in their exaggerated promises of what they could deliver.
The simple facts are that on Friday morning, at the Moscow offices of the Russian state property fund, the fifth-ranked Russian steelmaking group Mechel offered Rb58.196 billion (US$2.3 billion) to take a 68.86% shareholding in Elgaugol (“Elga Coal”), comprising smaller stakes held by the regional Sakha government and the Russian state railways company, RZD; and a 75% minus 1 share in Yakutugol (“Yakut Coal”), owned by the Sakha government. Altogether, the coal reserves of the two companies have been estimated at 3.9 billion tonnes, mostly of coking coal. Mechel’s bid price was 23% above the Rb457.4 billion (US$1.8 billion) reserve fixed by the selling authority. The bidding took 30 minutes, and at conclusion, a representative of Arcelor Mittal declared that his company “is surprised that it has not been admitted to the bidding, and waits for an explanation of the reasons”. If this sounded like a threat to take the Russian government to court, it compounded the folly of making the bid public in the first place.
With coal reserves of 1.7 billion tons, Yakutugol was partially privatized in Mechel’s favor in January 2005, when it paid $411 million, outbidding other domestic steelmaking rivals. The price then was believed to have been a risky gamble by Mechel, based either on a promise from Sakha boss Shtirov, of a control shareholding at a cheaper price; or on financial backing from a Japanese trading house. Calculated in terms of value-per-tonne of coal reserves, Mechel’s price in January 2005 was 40% more than the valuation Mechel subsequently offered to take Elgaugol and the rest of Yakutugol off the hands of the Sakha government and RZD.
Mechel’s Russian rivals then tried to revoke the 25% sale, and prevent Mechel, or Shtirov, combining to take the rest. A faction of officials urged the Kremlin to revoke the initial 2005 privatization, on the grounds that the transfer of the mine asset to Sakha a decade earlier had been unlawful.
Court proceedings to rule on the issue were started; they were then stopped by an agreement on asset transfers between Yakutsk and Moscow and restructuring of Alrosa. This left Mechel in the lurch with Shtirov, whose promise that he would agree to sell Mechel majority control of mine was not endorsed by Putin. According to a source inside Mechel at the time, “Negotiations are still going on, but they are tough ones, as we have to negotiate both with Russian [federal] and the local Sakha authorities. We are proposing various schemes as we are interested in all the assets – Yakutugol, Elgaugol, and probably a merger of them in the form of Sakhaugol. We expect the answer by the end of the year.”
Weeks later followed the Brazilian iron-ore miner Companhia Vale do Rio Doce (CVRD), which entered the bidding for Mechel’s plan to merge the two coal deposit companies, and provide the substantial foreign investment required for mine development and export marketing of the coal. A press leak of CVRD’s interest appears to have been orchestrated to add the allure of a large Brazilian cash injection to Mechel’s plan. In addition to CVRD, Mechel reportedly approached the LG and Posco groups of South Korea; and Sumitomo and Mitsui in Japan.
The time has now come, and Mechel cannot afford its winning bid by itself. Nor could Alrosa afford to compete. The NYSE-listed Mechel has a current market cap of $7.6 billion, more than double what it was at the start of this year. Alrosa is a closed shareholding company, wholly owned by the Russian state, with an estimated asset valuation of between $6 and $7 billion. Mechel’s first-half revenues were $3 billion, with roughly the same revenue value expected for the second half of the year, if stainless and other specialty steel prices remain stable; after-tax income to June 30 was $489 million. Alrosa’s revenues from diamond sales last year amounted to $2.8 billion; after-tax income was $572 million. This year, the company has announced that its revenue target will be $2.9 billion; its after-tax income, $557 million. Financially, Mechel is growing; Alrosa is stable to shrinking.
Official announcements from the Sakha region government indicate that, over the past fortnight, the region and Alrosa had struck a private agreement with Mittal that he would support their bid for the coal assets. He also promised to build a steel mill in the Sakha region, if together they won the coal contest. With Mittal, Shtirov appears to have double-crossed Mechel, and double-timed the Kremlin.
Mittal also lodged a separate, sole bid through a local company called Kolorprofile. Sources at the State Property Fund have told Mineweb that Kolorprofile was excluded from the bidding, and not allowed to participate. The only rival bidder allowed in the contest was Alrosa, bidding through Yakutugol.
But Shtirov and Vbybornov over-reached themselves. Federal government officials have been hostile to the Sakha administration for refusing to comply with the federal government’s restructuring of Alrosa’s shareholding, and have been considering several options for changing board chairman, Finance Minister Alexei Kudrin, and Vybornov, both considered too close to, or too soft with, Sakha president Shtirov.
Shtirov was reappointed by Putin last January. But his seat is only warm until the December parliamentary elections, and the presidential election of next March. After those election uncertainties have been resolved, Shtirov’s value to the Kremlin will evaporate, and he can be removed for a more compliant figure.
Sources also have told Mineweb that, days after his September appointment, the new Prime Minister Victor Zubkov had proposed removing Kudrin from the finance ministry, and replacing him. One candidate for the opening was Dmitri Kozak, a St. Petersburg lawyer who has been the Kremlin’s negotiator in the war-torn Caucasus for the past three years. This plan was changed by Putin at the last minute, and Kudrin given a promotion in rank to deputy prime minister. He hung on to the finance portfolio, while Kozak was assigned the limbo ministry of regional development. He must now wait for another reshuffle, probably in December. Kudrin may be obliged to give up his chairmanship of Alrosa.
The indecision and faction fighting surrounding the Finance Ministry and Alrosa just days before the coal auction ought to have persuaded the Mittal family not to risk their name in such an uncertain power play. Whether it was father or son, who decided to take the risk, is not known. But, Lakshmi and Aditya did jump without their parachutes on Friday. On Saturday, the picture of their crash was displayed across the front pages of Moscow’s newspapers.
On the surface, Mechel’s controlling shareholder, Igor Zyuzin, who was at the auction rooms for the bidding, won an easy victory, allowing a company spokesman to announce that it had secured $2 billion to put in the envelope for its winning bid from ABN Amro and BNP Paribas. Mechel has also said that it has undertakings from Sumitomo and Mitsui, Japanese coal traders and importers, to finance and develop mining plans for the coal. The Japanese will be allowed to take minority shareholdings in a float of the newly consolidated assets; the big Indian cannot charge that it was racism that led to his exclusion.
There is, however, a catch for Zyuzin. In return for making him a coal king, the Kremlin may have extracted his promise to sell the Mechel steel division.
Mechel remains stonily silent about the proposed sale of the steel division to a state-owned specialty steel holding called Russpetstal (“Russian Specialty Steel”). As Mineweb has reported before : , Rosoboronexport (ROE), the state-owned arms export monopoly, headed by Sergei Chemezov, is acquiring mineral and metal assets upstream of strategic arms and heavy machinery manufacturers. Mechel was identified a year ago as one of Chemezov’s targets. But there has been no official announcement regarding the ongoing sale negotiations with Zyuzin, Mechel’s controlling shareholder.
Chemezov hinted in September that ROE has made Mechel an offer — and that Mechel had not responded. Mineweb was told by ROE that the offer is limited to Mechel’s stainless steel production assets, not the group’s coal, iron-ore or nickel mines. And there you have the shape of the deal that appears to have been made between Mechel’s Zyuzin, Chemezov, and Putin. Zyuzin wins, but he must share with the state. Mittal turns out to have been the carpetbagger, who thought he could grab the loot and run.
Mechel’s Chief Executive Alexei Ivanushkin reacted to the public bidding by Lakshmi Mittal as “public relations, and not so successful.” First, a metallurgical plant assumes the presence of numerous qualified manpower, not present in Yakutia. Secondly, the energy required for steelmaking is costly, and in Yakutia there is an observable deficiency of electric power. If Arcelor Mittal would get access to coal supplies, it can use them as a lever of pressure on Russian metal companies.
Ivanushkin also pointed out that the Mittal move had been a surprise. “Two or three weeks ago, no one had any understanding of the intentions of Arcelor Mittal. But at many meetings–from the lips of the President and the Prime Minister–there has been the message that Elgaugol is a strategic asset which only a Russian investor should operate.” Ahead of the shareholding auction, Ivanushkin said he expected that a restrictive measure would be found to deal with Mittal’s bid “in our national interest”.
And so it was.