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By John Helmer, Moscow

Three years of litigation in New York and Delaware between Severstal and US steelmaker RG Steel over a failed Maryland steelmill, for which Alexei Mordashov paid $810 million, will be finalized at a US court hearing on July 15. Moscow and US sources report that lawyers for the two sides are expected to present for the judge’s approval an agreement for RG Steel to receive $30 million in cash from Severstal, and in exchange, Severstal will acquire RG Steel’s 50% stake in their joint coke venture, Mountain State Carbon (MSC).

At most, this outcome for Severstal is worth $70 million – one-eleventh of what Mordashov originally paid in March 2008, announcing at the time: “We believe in the long-term promise of the U.S. market.”

The liquidation, er new transaction, terms — confirmed this week by RG Steel but without comment from Severstal — reveal how much less Mordashov, controlling shareholder of Severstal, is likely to get from the sell-off of the remainder of his US steelmaking assets for which he paid another $3 billion in takeover or investment. A court-approved deal next month clears the way for Severstal to sell its Michigan and Mississippi mills, plus Mountain State Carbon, for another fraction of his $1.5 billion asking price.

RG Steel has been in court-ordered bankruptcy in Delaware since May of 2012. Severstal launched its claim against RG Steel six months earlier. For that story and the court papers detailing the claims on both sides, read this. RG Steel’s version was that Mordashov had sold them a pup.

Moscow industry sources believe the settlement will pave the way for Severstal to sell its remaining two US steel plants at Dearborn, Michigan, and Columbus, Mississippi, plus the MSC coke plant, to US Steel. A report this week by Denis Gabrielik, steel analyst for Otkritie Capital in Moscow, claims that after deducting the debts owned by the three plants, Severstal stands to gain $1.5 billion from the US selloff. For that story, click.

Court papers from Severstal’s suit against RG Steel reveal that RG Steel had disputed inventory, debt and other asset calculations in the price it had agreed earlier that year to pay for Severstal’s Sparrows Point steelmill in Maryland. The transaction terms, as announced by Severstal, required RG Steel to pay $125 million in cash, $100 million in a deferred payment note, and an undertaking to clear $317 million in “third-party debt”. The sale also required Renco, a New York investment holding which owns RG Steel, to assume employee-related and environmental liabilities totaling $650 million; these had accumulated since the Severstal takeover in 2008. Severstal acquired the asset from ArcelorMittal, after the latter had been ordered by a US court to divest so as to meet anti-trust approval of the earlier takeover by the Mittal family of Arcelor.

Severstal began laying off mill workers at Sparrows Point within two years of its purchase. RG Steel closed the mill for good within a year of its purchase from Severstal.

The New York court case has focused on RG Steel’s claim to reduce the cash price for Sparrows Point by $83 million to just $1.9 million, after claiming fresh “adjustments”. In court Severstal alleged these were improvised accounting interpretations, not asset measurements, and that RG Steel had undertaken all the due diligence it wanted on the mill’s balance-sheets before it signed the purchase agreement. Severstal asked the court to require RG Steel to pay the full $84.9 million, plus legal costs. Severstal then joined the bankruptcy court claims against RG Steel.

Until now RG Steel and its parent Renco have said they would not comment on the pending litigation. In a fresh statement last week, RG Steel said: “The settlement agreement will allow the debtors [Severstal] to collect $30 million in cash for the ultimate benefit of their creditors, eliminate significant litigation expenses for the estates and avoid the uncertainty of pursuing the litigations to judgment.”

For the time being, the settlement terms allow both sides to declare victory. RG Steel recovers cash of $30 million, a third of its claim. But Severstal takes the half-share it didn’t already own in the MSC coke plant. In the past, this has been publicly valued between one-quarter and one-half a billion dollars. The most recent Severstal financial reports describe the plant as operating four coke oven batteries, refurbished in 2006, and providing “approximately 60 per cent of Dearborn’s coke needs.” For a prospective buyer of the Dearborn mill, Severstal has wanted to deliver MSC as well.

In its financial report for 2013 Severstal’s investment in MSC was reported as $67.5 million, and its then half-share in MSC valued at $116.1 million. The March 2011 deal between Severstal and RG Steel obligated the latter to sign a $100 million promissory note for Severstal, payable after five years, and secured by the half-share in MSC. That note will now be cancelled and the stake transferred to Severstal for the re-sale negotiation with US Steel.

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