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By John Helmer, Moscow

Not even Prime Minister Vladimir Putin at a smelter inauguration, Bloomberg promotion, lashings of gold paint on the factory walls, and fourteen hundred spotless white worker uniforms have given Chelyabinsk Pipe (Chelpipe, ChTPZ), Russia’s third largest producer of steel pipes and tubes, the dressing-up required to attract international buyers for its shares on the London Stock Exchange. Chelpipe is the property of Andrei Komarov (rabbit), whom Forbes reports to be a billionaire, if Chelpipe is worth what he says it is. Only it isn’t.

According to a London source close to the attempt at selling Chelpipe shares last week, there was “a very limited support structure on the sell side; poor communication of company/sector dynamics; and [the share price proposed was] not cheap. Russian issuers are always greedy and most IPO’s underperform in the after-market.” Chelpipe has failed to get even that far. JP Morgan was the underwriter.

Despite the lucrativeness of the oil and gas industry which it supplies, Chelpipe was a loss-maker in 2009, carrying at least $2 billion in debt. And despite the revival of profitability last year, Chelpipe has now announced withdrawal of its initial public offering (IPO) from the London Stock Exchange this week. The company has been trying to sell about 30% of its 472.4 million shares at a price of almost $6 per share, for a company valuation of between $2 billion and $2.7 billion. At peak before the 2008 crash, the company’s shares were trading at $4.55. The price then dived to just 50 cents at the start of 2009. At the peak of its subsequent recovery, on January 26, the price was back up to $3.40. Even at that point, the most Chelpipe was worth was $1.6 billion. Komarov’s stake was thus worth not more than $643 million. With board member and chief trader Alexander Fyodorov, Komarov is reported to control about 80% of the existing shares through holding companies registered offshore.

Had the IPO succeeded, the duo would have pocketed up to $200 million in cash, while the company might have had a balance of $600 million to help clear its debts, particularly the short-term ones. Clearing debt, however, hasn’t seemed as appealing to Komarov as waiting for a bigger personal payday.

A Moscow newspaper citing anonymous company and brokerage sources claims today that the Chelpipe shares would have been sold if Komarov had agreed to lower his asking price by 10% to 15%; the discount value of Chelpipe would thus have been marketable at $1.7 billion, or roughly where the share price was last month. Today, the share price is between $2.50 and $3.10, for a market cap of $1.5 billion.

The future for Chelpipe depends, however, not on the global boom in oil and gas, but on pipe procurement contracts from state-controlled domestic enterprises – Rosneft, Gazprom, and Transneft, Russia’s pipeline company. These pipe consumers are famous for declaring large philanthropies, but the Russian pipemakers aren’t notable among the recipients. The Kremlin, and most especially Deputy Prime Minister Igor Sechin, decide what the price of pipes should be; what guarantees of procurement volume and sales revenue the pipemakers should enjoy; and how much profit should be distributed along the chain of production from iron-ore mine, to steel smelter, to oil well, and to Swiss oil trading company. Accordingly, Komarov and Chelpipe are in the same boat as Russia’s other, bigger pipemakers – TMK is publicly listed and controlled by Dmitry Pumpyansky; United Metallurgical Company (OMK) remains privately owned by Anatoly Sedykh behalf of others.

Komarov and his advisors tried to fix a share price at almost the same price to earnings and enterprise value to earnings multiples as are currently enjoyed by the more visible, larger TMK. Its current market cap is $4.5 billion – at least two and a half times Chelpipe’s.

But Komarov’s Chelpipe is not the only Russian IPO to have failed in recent weeks. Oleg Deripaska’s Eurosibenergo led down the hole last November, when his attempt at selling shares on the Hong Kong Stock Exchange was withdrawn after buyers failed to materialize at the target price.

Last week, the small Russian pig-iron and coke producer Koks also withdrew its share sale from the LSE after Citigroup, UBS and VTB Capital failed to find buyers willing to buy into the company at a valuation of $2.1 billion and $2.6 billion. Koks is a family affair, owned and managed by Boris Zubitsky and his family. In 2009 (the last posted financial results), it was loss-making on sales revenues of Rb29 billion, and with short and long-term liabilities of Rb31 billion.

And that’s not all. A well-known Russian metals specialist is forecasting that “Nord Gold is the next post-mortem”. According to him and London investment fund sources, Alexei Mordashov’s IPO attempt to list Nord Gold and sell his shares in Nord Gold is also down the black hole. Published Moscow speculation claims the market is demanding a discount of not less than 15% from the bottom of Mordashov’s price demand between ₤3 and ₤3.90 (US$4.77-$6.20).

But lo and behold! Even before Mordashov is safely clear of his black hole, Mikhail Prokhorov has announced a dive of his own. According to a statement reported overnight by Reuters, Prokhorov is announcing that he plans to list Polyus Gold’s shares directly on the LSE by this summer (Polyus Gold is currently listed in Moscow and traded in depositary receipt form in London). Either before or after that, Prokhorov says he will sell a strategic stake in the company. This isn’t news.

But Alfa Bank metals analyst Barry Ehrlich reports that Prokhorov is trying to pinch value from Mordashov, and undercut investor interest in Nord Gold.

According to Ehrlich’s report, “Polyus CEO Mikhail Prokhorov announced that the company would sell the 5.6% of shares held at the subsidiary level following the company’s redomiciling and listing on the LSE. This would lift free float to 25% from the current 17%, according to Prokhorov. He also reiterated plans to merge with a top-five global gold miner. We believe this news is NEGATIVE, as it reinforces the market’s belief in a substantial share overhang in the stock.”

Today’s Moscow and London market reaction to the announcement is the same as Ehrlich’s: Polyus Gold is down 4.4% in trading before lunch – a loss of half a billion dollars in paper value.

“It is also possible,” Ehrlich reports, “this announcement was timed to affect the NordGold offering. If the placement succeeds, it would be a competing instrument that could pull away some investment money from Polyus. We reiterate our view, outlined in our note downgrading Polyus to U/W [under weight] — Polyus is likely to lose value in a merger scenario because the stock trades at higher valuation metrics on two out of three key valuation criteria than the most expensive global major.”
 

Last July, Bloomberg quoted Sergey Moiseyev, chief financial officer of Chelpipe, as saying: “It was Mr. Komarov’s idea to paint gold all technological equipment at the new mill so it would resemble the mechanism of a giant Swiss watch,” The plant, Bloomberg gushed as Russia’s most modern, “came under the scrutiny of Prime Minister Vladimir Putin when he visited today [July 23]. ‘It felt as if I were in the theater or in Disneyland,’ [Putin] said after entering the site. ‘It’s great’.”A company press release reports that Putin went back to inaugurate a new smelter at Chelpipe on November 18.

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