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By John Helmer in Moscow

Nesis considers chrome sell-out in the most lucrative, short mining career on record

A press leak in Moscow on Monday, followed by a confirming announcement from Mechel, the Russian stainless steel producer, have indicated that Igor Zyuzin, Mechel’s controlling shareholder, is trying to buy out chrome producer Oriel Resources, owned by Alexander Nesis and the ICT group of St. Petersburg.

Mechel’s corporate office was initially reluctant to confirm the reported talks, and the company’s press release said only that Mechel “is currently contemplating the acquisition of Oriel. This process is at an early stage and there can be no certainty that any offer will ultimately be forthcoming.”

The target of takeover is an integrated ferrochrome producer based in the Leningrad region, the Tikhvin ferroalloy plant, with its own raw supply from two mines in Kazakhstan — a chrome mine called Voskhod, and a nickel mine called Shevchenko. Nesis’s ICT group have been involved in the chrome project for several years, when Nesis owned Polymetal, a St.Petersburg based silver miner. In 2006 Nesis sold Polymetal for $930 million in cash to Suleiman Kerimov, and began investing some of the proceeds in the chrome project.

ICT remains a private holding. Its last website posting dates from December 2006, when ICT said it had completed “the merger between its metallurgical assets and those of Oriel Resources Plc. At their latest extraordinary general meeting, Oriel Resources Plc. shareholders voted in favor of the deal, which will see a new integrated metallurgical company formed by uniting Voskhod, one of the world’s largest chromite ore field, and Tikhvin Ferroalloy Works. The Voskhod field, located in, belongs to Oriel Resources Plc., while Tikhvin Ferroalloy Works, located in Tikhvin, Leningrad Region, is owned by ICT Group and its partners. ICT Group President Alexander Nesis will sit on the Board of the new company.”

In 2007, Tikhvin started production of ferrochrome, with design capacity of 148,000 tonnes pa. The Voskhod mine is due to start production later this year.

Oriel Resources is a London AIM and Toronto Stock Exchange listed company whose share price has jumped from 40.5pence on December 18 to 99.25p just before the takeover disclosure to the market. The website of Oriel Resources is currently inaccessible due to a virus warning.

The Toronto Stock Exchange halted trading in the company’s stock on Monday morning, but then resumed trading after official press releases were issued. Following Mechel’s release, Oriel issued one of its own confirming that “that today it has received a non-binding indicative proposal from Mechel. Shareholders are advised to take no action at this time.”

On the share speculation since December, Nesis has seen Oriel’s market capitalization almost doublefrom GBP 331 million ($656 million) to GBP 616 million ($1,223 million). This gives Nesis’s chrome venture a higher sale value than his silver mining company, when that was sold in 2006. Nesis has also sold out his shipbuilding and port assets in the St.Petersburg area.
Oriel is a relative newcomer to the Russian chrome sector, but Nesis has been contemplating a chrome refinery and mine plan since 2003. In June of that year, when he was still the proprietor of Polymetal, Nesis announced publicly that he was at the final stage of making a decision to invest into construction of the Tikhvin ferrochrome plant, pledging to make up his mind “before the end of this year”, and also promising about $60 million in capital expenditure on the project. At that time, Nesis said, he planned to source his chrome ore concentrate from Turkey.

Alternatively, he said, he was considering the possibility of mining the Aganozerskoye chrome deposit in the Karelia region, north of St. Petersburg. That option would have cost Nesis another $50 million; he appears to have decided against it. Aganozerskoye reportedly had the capacity to produce 90,000 tonnes of chrome concentrate per year. Delays in investment into Tikhvin resulted, when a group of Israeli investors Nesis was considering for capital partners in the venture, withdrew from the project.

Nesis was asked why he appears to be making his second exit from Russian mining so soon after his first, and whether he believes that the asset value of Oriel is peaking at present. ICT told CRU Steel News it is not commenting. A source close to Nesis said there are no negotiations at this point, but that developments can be expected in a week’s time. The initiative for the deal, it appears, is coming from Zyuzin.

MDM Bank warned Nesis to sit tight for the price to go up, but then warned Mechel shareholders against Zyuzin’s temptation. “Valuation however could be an issue”, reported analyst George Lilis, “because we are afraid that under the very hot environment for commodities, Mechel may be tempted to raise its offer and overpay at the peak of the cycle.”

If Nesis wasn’t the source of the news, how is it possible, as Renaissance Capital, a Moscow investment bank, reported on Tuesday, that the Oriel share price has been moving up on knowledge of the bid from Mechel? According to RenCap analyst Yury Vlasov, “the market was anticipating this move as Oriel Resources’ share price has advanced around 50% over the last month.” Vlasov was no doubt referring to some in the market, not others. Volume of trading during this period, according to the Bloomberg chart, was minimal until a single day in mid-February, when it hit 21 million shares (3%), a 52-week record:
http://www.bloomberg.com/apps/cbuilder?ticker1=ORI:LN
Recent coal acquisitions in the Russian Fareast have obliged Zyuzin to load Mechel with $2 billion in debt. If Nesis opts for cash instead of Mechel shares, which is Nesis’s likely preference, Zyuzin may require financing of another $1 billion for the takeover.

Zyuzin has been signalling that he wants to spin off the Mechel group’s mining assets, and list them separately on an international exchange. Mechel’s coalmines are included in this scheme, but it has been unclear whether the IPO plan for this year would also include Mechel’s iron-ore and nickel mines. Last year Mechel entered the ferro-alloy market, purchasing the ferro-silicon producer Bratsk Ferro-Alloy Plant. It produces 84,000 tonnesof ferroalloys. The possible acquisition of Oriel would more than double Mechel’s capacity in this area.

For years Mechel officials have been reluctant to identify their sources of supply of ferrochrome for stainless steel production. A veil of something like non-transparency also hangs over the Kermas group, a London registered holding for chrome and other ferro-alloy assets in the Urals region of central Russia. The assets include Chrome-Pik — renamed Russian Chrome 1915 — located in Pervouralsk, in the Chelyabinsk region; and the Serov Ferroalloys Plant, in the neighbouring Sverdlovsk region. The Mineweb backfile shows that the co-owner with Kermas of Serov was a Chelyabinsk group called Ariant, controlled by Alexander Aristov. Ariant also controlled the Chelyabinsk Electrometallurgical Combine, another ferroalloys producer. In 2004, according to Russian customs data, Serov and Chelyabinsk exported almost equal volumes of ferrchrome — about 64,000 metric tonnes in H1 2004. However, the data indicate a significant difference between the two in customs value, suggesting the existence of transfer pricing, tolling or other schemes.

Although Mechel denies it is under pressure to sell its steel division to the state metals company, Russpetstal (RSS), sources at the latter have confirmed that they have been negotiating for more than a year. The pressure was one of the factors that led to the decision of Zyuzin’s co-controlling shareholder, Vladimir Iorikh, to sell out in 2006-2007. Defensive measures against a state takeover have been adopted by Zyuzin, and the acquisition of Oriel’s chrome production chain creates both debt and asset value that may deter an RSS bid — if it is retained within the steel division.

On the other hand, industry sources believe that RSS is keen to secure chrome supplies for Russian steelmaking, and paying Nesis to hand over his internationally listed vehicle may be a move on which Zyuzin and RSS agreed in December, when the share price began its takeoff.

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