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By John Helmer in Moscow

Russia’s Evraz group cannot sell its Highveld assets but appears that it might be buying more Russian vanadium.

The Evraz group, Russia’s largest steelmaker, has twice tried to corner the global market in ferroalloys, once in manganese, and once in vanadium.

It has failed at both, obliged by stronger forces than it anticipated to withdraw entirely from the manganese game; and to withdraw for a pause in its vanadium attack.

Since July of 2006, Evraz’s South African acquisition, Highveld Steel & Vanadium, has been a test case of the European Commission’s (EC) will to regulate a Russian metals group in its global market reach. In the hope of changing vanadium’s losing streak, Evraz has been requesting extensions of time from the EC in Brussels, in the hope that the vanadium price will stop sliding, and lift the selling price of the Highveld assets, which the EC ordered sold off a year ago, and which Evraz has so far declined to do.

In addition to stopping the clock to buy more time against the metal price curve, Evraz appears now to have pulled a curtain over a fresh Russian vanadium acquisition, challenging the EC’s will to blow its whistle in the dark.

The sale and purchase a few days ago of Russia’s dominant producer of ferro-vanadium by an unknown steel distributor has triggered speculation that the Evraz group, controlled by Roman Abramovich’s Millhouse holding, is behind the deal — but in hiding, so as not to violate the EC’s order that it reduce its global vanadium production assets.

Mineweb has confirmed from both sides of the transaction that a brand-new company called SGMK-Metal has acquired Tula Vanadium. SGMK, owned by Alexander Rybkin, has said it has made the acquisition; Tula Vanadium, owned by the Industrial Metallurgical Holding of Boris Zubitsky, says Zubitsky has owned the 79% control stake in the plant since 2003, and has now sold it.

No details of the transaction price were released, but Zubitsky’s stake is estimated by Moscow brokerages to be worth at least $100 million. Inexplicably, the 9-month financial report from Tula Vanadium indicates a loss of Rb101.7 million ($4 million).

Tula Vanadium produces about 9,000 tonnes of ferrovanadium per year; it is the leading producer in Russia, with about 70% of the Russian market for the steel hardening product.

Evraz is the leading miner of vanadium in Russia, producing ore and concentrate from its Kachkanarsky ore-processing combine, and vanadium slag from its Nizhny Tagil mill.

The last published Evraz financials — for the first half of 2007 — report that the vanadium business contributed $241 million to group revenues; this was a threefold increase over H1 2006, and reflected the acquisition of two asset acquisitions, Stratcor in the US and Highveld in South Africa. Vanadium slag volume was 5,500 tonnes; other vanadium product volume was 4,200 tonnes, of which 2,700 tonnes came from Stratcor.

As a proportion of Evraz’s consolidated steel and other mining revenues, vanadium amounted to just 4%. Why would Evraz run the risk of challenging the EC over a such a small corner of the group’s business?

SGMK-Metal descibes itself as having been organized in May 2007. Although the expansion of its title acronym means Siberian Mountain-Metallurgical Company, its primary experience and operations have been in regional distribution and sales of steel products for the Evraz steelmaking group.

Based in Novokuznetsk, where Evraz operates two of its mills, SGM-Metal claims it operates warehouse complexes in Chelyabinsk, Ufa, Ekaterinburg, Novokuznetsk, and shortly to open, in Krasnoyarsk.

An official at SGMK-Metal was asked to say if there is an agreement between the company and Evraz for the Tula Vanadium takeover, to finance the acquisition and to provide for subsequent resale to the Evraz group. The officials declined to respond.

Irina Kibina, spokesman for Evraz, was asked if Evraz has negotiated with SGMK over the vanadium acquisition, or intends to buy it later. There was no response. Kibina has announced to a Moscow newspaper that Evraz “cannot buy vanadium shares as a condition of the authority from the European Commission to acquire the South African Highveld Steel & Vanadium.”

It was announced last week that Evraz has sought another three months of delay before it must sell off vanadium assets from Highveld to implement the EC anti-monopoly directive of February 2007. The initial deadline set by that ruling from Brussels was November 20; that allowed Evraz nine months from the approval of its takeover to divest the Highveld assets. The EC then issued a first extension of time to January 20. Without commenting on the intention or performance of Evraz, the EC issued a second extension to April 20.

The EC ruling was the first ever by the EC’s competition directorate to challenge the recent wave of international metal asset acquisitions by Russian oligarchs.

In an announcement posted on the EC’s website, the EC’s anti-trust regulators issued a warning to Evraz that “the proposed transaction as initially notified would give rise to competition concerns at all levels of the vanadium value chain.”

The Commission ruled there were “serious concerns that the proposed transaction would significantly impede effective competition worldwide for vanadium products, such as vanadium chemicals, specialty vanadium alloys for the titanium industry and ferrovanadium used for steel applications. The combination of the vanadium feedstock activities of Evraz and Highveld (ore, slag and residues), added to their combined presence in the downstream markets of vanadium oxides and finished products, would have given the merged entity the ability and incentive to reduce the global production of vanadium feedstock (in particular vanadium-bearing ore) so as to increase global vanadium prices and to foreclose the downstream rivals it supplies with vanadium feedstock. In addition, the merged entity would have gained a very strong market position for the supply of high-purity vanadium oxides.”

The divestment directive identified “portion of Highveld’s Mapoch iron and vanadium ore mine; Highveld’s vanadium extraction, vanadium oxides and vanadium chemicals plants (also referred to as the Vanchem operations); a ferrovanadium smelter located on the site of Highveld steel facility; and Highveld’s 50% shareholding in SAJV, a joint venture between Highveld and two Japanese partners active in the production and marketing of ferrovanadium. The divested business comprises all Highveld’s vanadium businesses with the exception of the production of vanadium steel slag as a by-product of its steel operation.”

The EC ruling was not exactly silent on Tula Vanadium, but it implied that it would remain at arm’s length from Evraz.

According to the EC statement, “Evraz [has] committed to maintain and strengthen the existing feedstock supply relationships with Tula, Chussovskoy and Treibacher. These companies are the major consumers of the feedstock sold by Evraz and Highveld. These supply commitments make a further contribution to eliminating the risk of feedstock supply problems to the vanadium-processing industry.”

Expert estimates differ on how much of the world vanadium supply Evraz would have controlled if its Highveld deal had passed the EC’s scrutiny. Michael Kavanagh, a metals analyst with UralSib Bank in Moscow, estimates that prior to the EC counter-move, Evraz was moving toward a 50% to 60% share of “raw” global vanadium production. Leonid Smirnov, director of the Urals Institute of Metals and the all-Russia expert on vanadium, estimated that, counting both Highveld and Stratcor (US) to Evraz’s Russian vanadium source, Kachkanarsky GOK, its global share of the vanadium market would be between 30% and 40%.

When Evraz first announced its bid to buy Highveld in July 2006, it proposed paying $678 million to acquire the 79% stake previously held in Highveld by Anglo American. It has subsequently sought to buy out the remaining minority shareholders.

Vanadium’s price peaked between mid-2005 and early 2006, as Evraz made its move on Highveld. Then, the vanadium price began to slide, and hit bottom just before Evraz applied to Brussels for its first extension. Since then, Evraz has been hoping that the pickup in vanadium prices would continue and support a higher divestment profit. The vanadium price went into a second slide during the November-January extension period Evraz requested. The current price remains 30% below what it was at takeover, and 13% below last month’s peak.

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