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MOSCOW (Mineweb.com) – At the start of Raymond Chandler’s last novel,the private detective Philip Marlowe is on watch at the Los Angeles railway station. “There was nothing to it,” he says to himself. “The subject was easy to spot as a kangaroo in a dinner jacket.”

Later, after trailing her to a hotel room down the Pacific coast, he observes: “She didn’t look like a tramp and she didn’t look like a crook. Which meant only that she could be both with more success than if she had.”

Two weeks ago, when we were on watch outside the London Stock Exchange, ts Vladimir Lisin was advertising to sell 420 million shares in his Russian steel company, Novolipetsk Metallurgical Combine (NLMK). A 7-percent shareholding in a company with revenues of almost $5 billion, its own iron-ore mines, and cash in the bank of almost $2 billion, and Lisin was as obvious as the kangaroo. With a little help from the BBC, his dinner jacket was also showing. “A former welder,” reported the epitome of British newsworthiness, Lisin is “already estimated to be Russia’s second richest man.” He was letting his shares slip, he told the BBC, to “raise Novolipetsk’s international profile.”

Two weeks later, after the Financial Times had trailed him to a hotel suite, Lisin complained that reporting of Russian business might be “scaring people away”. He added that he wasn’t selling because he lacked faith in Russia as a place to do business. And he was tired, he said, of the behaviour of foreign investors who “spend their time asking the [Russian] government what it can give them. What would you think of me,” he asked the FT, or none in particular, “if I came to the UK and concentrated my time on asking the British government for some sort of preferential treatment?”

Here was the innocent, to be sure, certain the FT reporter hadn’t read the small print in the NLMK prospectus. If he had, he might have spotted Lisin’s hostility towards the Russian government for not assuring him the preferential tax, transport, anti-trust, and power supply tariffs on which the profitability of his steelmaking depends. And also Lisin’s hostility towards the media, which “regularly published slanted articles in return for payment.” And then there are the disclosures of the two UK companies, through which Lisin trades much of his steel company’s metal, and possibly also its profit.

But wait – the appearances of things are getting ahead of the things themselves.

According to the official announcement, as of last Friday, December 9, the owner of NLMK (also called Novolipetsk Steel), Russia’s fourth largest steel producer, and also its most profitable steelmill, had sold his bloc of shares at $1.45 per unit, for a personal take of $609 million. Is this the dinner-jacket, or the kangaroo?

During year-long preparations for the share sale, Lisin had indicated that he wanted to raise more than three times as much, or almost $2 billion from the listing. In April, NLMK confirmed that it had secured permission of the Russian securities regulator, the Federal Service for Financial Markets, to sell 1.498 billion shares, or 25.1% of the existing stock, on a foreign exchange. At the time, Lisin’s holding was 95.6%. The big sale was scheduled for June, but then called off.

In August of this year, Lisin arranged for the sale of two blocs of shares,totaling 3.34%, to two companies, Costen and Akractos; these are in turn owned by members of the management or board of directors of NLMK, or its affiliated companies. Another 1.2% bloc was also sold to Trixton, a company indirectly owned by the steel trading companies Lisin controls for NLMK’s exports. These transactions appear to have been a form of untaxable share option distribution, with a purchase price below $1.20, and no payment required until December 31, 2006.

Another 1.2% was sold by Lisin, also last August, to unaffiliated investors. That left him in control of 89.85% of NLMK’s shares at the listing announcment, when it finally came on November 24. After the placement of the shares was announced last Friday, Lisin continues to hold at least 82% of the shares through Cyprus-registered and other offshore companies.

Disclosures in the NLMK prospectus, despite its highly restricted circulation, appear to have lowered the bidding price for the NLMK shares by 3%, compared to the Moscow stock exchange price on December 9; and by 8% off the peak which NLMK’s stock hit on the Russian stock index, just before the formal announcement to list on the London Stock Exchange (LSE) was issued. The market capitalization of the steelmaker has been cut by more than half a billion dollars since Lisin engaged investment banks UBS and Merrill Lynch, and Financial Dynamics, a London public relations firm, to promote the sale of his shareholding.

Neither NLMK, nor Lisin’s London spokesman, Jon Simmons, agreed to release the prospectus, nor answer detailed questions relating to the way in which Lisin has organized the steelmaking company, its raw material suppliers, and trading units.

Unlike the Russian steel companies which have preceded Lisin on to international markets – Mechel at the New York Stock Exchange in October 2004; Evraz at the LSE last July — the NLMK document of almost 300 pages was not prepared in pdf format, easy to transmit electronically from fund manager to manager, brokerage to client. Instead, it was circulated in a bound hard-copy that could not be easily machine-scanned or copied. Photo-copying the prospectus by hand requires several hours.

Once available, however, the prospectus makes the unusual statement up front that the principal risk to investors in buying NLMK shares from Lisin is “our controlling shareholder’s ability to exert significant influence over us [NLMK].”

That he had already done what he could to raise the selling price was also disclosed. In a note to the accounts, in 2002 an $85 million interest-free, 2-year loan of NLMK funds was issued to LKB Invest to facilitate purchase of shares in NLMK. The borrowing unit was then absorbed by LLC Rumelco, owned by Lisin, and the loan paid off in 2003.

Although considerable historical and financial detail is revealed for the first time about Lisin’s acquisition of the steel plant from the Trans World group of London, controlled by the Reuben brothers, a significant omission is the ownership and operation of three trading companies — Steelco Mediterranean Trading of Cyprus, Moorfield Commodities and Tuscany Intertrade, both of the UK.

According to the prospectus, these three are “independent wholesale traders”. There is a “long term strategic partnership”, agreed in October 2004 for three years, between these companies and NLMK for sale of at least 70% of NLMK’s steel exports. In 2004, the percentage was 90%; this year to September 30, the percentage has been 85%. Nothing about the ownership of the traders is disclosed, except that they are “under common ownership” and “unrelated parties to NLMK”.

By press time, Lisin’s spokesman did not respond to questions about who owns, controls or benefits from their operations. If, as industry sources believe likely, the trading companies are controlled by Lisin, then he is able to vary the export pricing of NLMK’s products, so as to enhance, or detract from, the cashflow and profitability of NLMK’s domestic operations and its balance-sheet. In current market conditions, that may be of little concern to investors – NLMK reports that as of September 30, it held cash and cash equivalent of $1.93 billion, with debt of just $19.9 million.

Precise financial details of the export revenues are not disclosed in the prospectus. However, data reported on export percentages indicate that exports amounted to 74% of NLMK’s sales revenues in 2004; or about $3.3 billion in value. This year, the proportion changed significantly, with just 58% of sales revenues accounted for by exports in the first nine months of the year; for a value of $1.9 billion. According to a note to the accounts, prepared by PriceWaterhouseCoopers, the three trading companies owed NLMK about $294 million at December 31, 2004; by September 30, this was $238 million. The prospectus reports that the traders must make payment within 60 days of delivery of goods, but concedes: “any failure by these international wholesale traders to satisfy their payment obligations to us may adversely affect our financial condition and results of operations.” The company also concedes that Russian law on transfer pricing between related companies could have a detrimental impact on the group’s financial results.

At the same time, and in parallel, NLMK reports that it has reduced the proportion of low-value pig iron and slabs in its export shipments, while raising the share of relatively high-value hot and cold-rolled steel, and grain oriented steel. NLMK’s export destinations have also shifted, with declines in shipments to the European Union and North America, and offsetting increases in shipments to Asia.

The consolidated structure of the NLMK company, as reported in the prospectus, includes three mining units, the most important of which is Stoilensky ore-processing combine (GOK), the iron-ore supplier, for which NLMK appears to have paid $659.3 million when it was consolidated into the NLMK structure last year. NLMK reports that it is now self-sufficient in iron-ore. On a stand-alone basis, before consolidation, Stoilensky reported profit in 2004 of $207.8 million; it is the target of an on-going Russian government investigation into price collusion in the iron-ore sector.

Coking-coal production, the second basic raw material requirement for steelmaking, is not consolidated in the NLMK structure as yet, although the prospectus refers to the acquisition in August 2005 of the licence to develop the Zhernovskoe-1 deposit in Kemerovo (Siberia). NLMK says it plans to invest $430 million in the mine over the next four years, and that when fully operational, it will supply 50% of the group’s steelmaking requirement. Who will own the coal mine is not disclosed. The prospectus reports that “we are currently in talks to acquire more than 90% of the shares of a Russian coke producer. As part of this transaction we may also acquire a number of coal producing companies.”

NLMK’s scrap supply requirement, another vital feed for the furnace, is 2.3 million tons, of which 1.4 million tons (60%) are supplied by third parties. Limestone and metallurgical dolomite come from consolidated subsidiaries, while ferroalloys come from third-party suppliers.

Control of transportation , especially maritime outlets for exports, is a key element of the group’s vertical integration, according to the prospectus. However, the document identifies only Tuapse port and related facilities, on the Black Sea, as consolidated within the NLMK group ownership structure. The larger-volume St.Petersburg port company, which Lisin acquired through offshore companies in the past two years, is not included.

Fresh steel assets are very briefly referred to in the prospectus. Lisin appears to have changed his mind regarding expansion abroad. Dan Steel, which he bought in Denmark several years ago, may be sold by him to NLMK, but no decision has been reached. After a period of disclaiming interest in foreign acquisitions, this year Lisin put himself in contention for the Erdemir privatization in Turkey, only to drop out when the bidding price exceeded his target.

NLMK also reports “we are currently in talks to acquire another Russian steel producer specializing in high value-added types of steel.” No details of the target are available.

The key to understanding why Lisin and his bankers and promoters are so furtive about the details of their business lies in their underlying lack of confidence that they can count on hanging on to it. Notwithstanding what he told the Financial Times, Lisin and the NLMK management don’t really enjoy the Russian business environment. Corruption is rife in the courts, NLMK declares in the prospectus – and not only there. Challenges to the way in which the steel plant was privatized – its employee vouchers bought up by Trans World, Cambridge Capital Management, Boris Jordan, and Vladimir Potanin -could still occur, and heavy back-tax claims could be imposed. “Signs of a breakdown in the consensus among key government officials are beginning to appear”, the prospectus concedes, arousing apprehension.

The case of convicted Yukos oil company fraudsters Mikhail Khodorkovsky and Platon Lebedev is reported in the prospectus as a serious omen for Russia’s largest asset holders. Lisin isn’t about to concede the folly of Khodorkovsky’s attempt to sell up to 40% of his oil assets to a US oil company, despite a Kremlin veto. But he has been careful to apply for government permission to sell his stake;and even more cautious to keep it small. Steelmaking, iron-ore and coal mining could be strategic to Russia’s economic security, the prospectus acknowledges, and thus the permissible scope of Lisin’s future ownership of these assets uncertain.

This, then, is the strategic problem for Lisin, and others with similarly large resource and commodity holdings. To acquire them, and then secure them from counter-attack, a decade ago, required vertical integration from raw material to production plant and transport outlet; with the shareholdings distributed in chains of offshore companies so numerous and complex as to defy investigation and defeat unravelling . To achieve market value, however, requires consolidation of shareholdings, assets and cashflows; audited financial reports and disclosure of related party transactions; the appearance of tax compliance; and market assessment of risk.

Lisin, like other major Russian asset-holders, can’t let go of the trading chain he created a decade ago, and the prospectus reveals how limited to date the consolidation process of the NLMK group has gone. Lisin is simply keeping some of his most valuable eggs out of the basket. Were there to be an attack by a domestic rival on the core steelmaking plant, or a squeeze on raw material or energy supplies, he could quickly transform his existing structure into a heavily indebted shell, with the profits exported to the safe havens he continues to operate offshore. That Lisin is less inclined to do this than some of his peers in Russian metals is to his credit.

But he also undermines the credibility of his ambition by one of the worst disclosure records in the Russian steel sector. The investment market, according to the NLMK prospectus – if you can find a copy, break open its spine, and analyze what is missing — should deliver a vote of confidence in Lisin’s share price. But he has structured his group, and his listing, in a fashion that suggests he takes more seriously the Russian risks adumbrated in the prospectus than he asks investors to accept. Anything discovered to the contrary must be “slanted in return for payment”. The kangaroo in the dinner jacket.

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