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By John Helmer in Moscow

In an unusual break with the traditional hold Russian steel companies like to keep on their domestic coking-coal sources, and secure the future expansion of their steel capacity with ample reserves, the Evraz group is reported to be considering the sale of two of its Kemerovo mines to global and regional rival, ArcelorMittal. If they are good mines, why is Evraz selling? And if they are bad ones, why is ArcelorMittal buying? ArcelorMittal, which initiated the industry reports of the asset deal, has firmly silenced the tongue that was wagging; Evraz refuses to open its mouth at all.

According to a wire service report, Ivan Shemyakin, technical director of OAO Severny Kuzbass, an ArcelorMittal company in Russia, says the group has “studied different mines in Siberia that could allow ArcelorMittal to expand in coking coal. We have filed due diligence results to head office to make the final decision.” He named the two mines of acquisition interest to ArcelorMittal as the Yerunakovskaya-8 and Yubileinaya mines. When asked to confirm what he is reported to have said, Shemyakin told CRU Steel News on Friday he is “too busy to speak”. Evraz spokesman Alexei Agureyev was asked to confirm the sale discussions; he responded that Evraz is refusing to comment.

Evraz does not release individual coal-mine data in its consolidated reports. A website posting by the company lumps Yerunakovskaya-8 and Yubileinaya together with ten other mines in the Yuzhkuzbassugol (“South Kuzbass Coal”) group; together, they reportedly produced 12 million tonnes of coal in 2007, 56% of which was coking coal. A more recent industry estimate suggests that output at Yubileinaya was 437,000 tonnes in 2009, down 63% from the 2008 level. This was a sharp drop inside the aggregate of Evraz’s coking-coal output for 2009, which amounted to 10.3 million tonnes, up 14% on the year before. The mine’s performance was also significantly worse than Evraz’s crude steel production in 2009, which came to 11.3 million tonnes, down 14% for the year. Industry media indicate that Yubileinaya holds unmined reserves of about 70 million tonnes.

Last July, ArcelorMittal came in for direct and sharp criticism by the Kemerovo governor, Aman Tuleyev (centre image). This was the reaction by the local government to reports that ArcelorMittal was closing down two of its local mines, Pervomaiskaya and Anzherskaya. According to Yuri Udartsev, deputy head of the Industry Department at the Kemerovo regional government, “at the current rate [of coal prices], these two mines have no prospects for the future. That is why the regional government could not remain neutral in the situation. [Governor] Tuleyev proposed to ArcelorMittal either to take measures to save the mines, or their license for the Zhernovskoye deposit will be revoked.” The quid pro quo was obvious – either ArcelorMittal should accept current losses at the mines in return for future profits from the as yet undeveloped Zhernovskoye deposit; or risk losing the lot. The governor’s aide, Oleg Shishko, confirmed that in the text of a telegramme Tuleyev had sent Lakshmi Mittal, the governor had charged: “there are serious infringements of technological discipline at conducting mining works”.

The Kemerovo assets were acquired in April 2008 by ArcelorMittal, after the group had failed in a bid to buy the much bigger Elgaugol and Yakutugol deposits in fareastern Russia. Mittal agreed to pay $650 million in cash to Alexei Mordashov, owner of the Severstal group, which had been operating the complex of the two operating mines, plus the Zhernovskoye-3 deposit. Mittal paid an additional $70 million to minority shareholders. According to a press release at the deal announcement, Mittal claimed to be “pleased to be acquiring these mines which will provide an important and competitive source of coking coal supplies for our steel production, raising our self-sufficiency from 10% to 15%. This acquisition also helps ArcelorMittal establish a presence in Russia, a fast growing market for steel production.”

The mineable reserves at Zhernovsoye were estimated at the time of ArcelorMittal’s takeover to be 46 million tonnes.

That deal mystified the Russian market, because it appeared to be much more favourable for the seller at the time, Severstal, than for the buyer, ArcelorMittal. Severstal itself was unhappy at the costs of supplying its own northwestern Russian steelmill from the Kemerovo mines it was selling, while they were located far from Mittal’s nearest steel mill, at Temirtau, in the Karaganda region of Kazakhstan, more than a thousand kilometres to the southwest. The Krivorozhstal mill Mittal owned in the Ukraine was more than three times further to the west.

A leading Russian steelmaker told CRU Steel News at the time that it was Mittal’s last shot at entering the Russian market, although he thought it far from certain to succeed. He turned out to be right. “As to where they will sell the coal, I have no idea. The assets are loss-making, and Severstal didn’t invest anything in these mines, or in the region — so it is very good deal for Severstal, per se. They are getting rid of a load here, and getting some cash instead. As to Mittal, this is their last and only chance to get any assets at all in Russia.”

About fifteen months went by before the losses at Pervomaiskaya and Anzherskaya broke ArcelorMittal’s willingness to keep mining. But then the Mittal group ran into resistance from Tuleyev to let them make their getaway. After his ultimatum was issued, ArcelorMittal posted its public reply, saying “under the current adverse economic situation, ArcelorMittal has decided that the best future for this mine would be to pursue alternative solutions to develop it, including selling it to interested strategic buyers…We are in discussions with the local government to find the most optimal [sic] solution. We will continue to develop and operate the other two mines based on the demand for coking coal in the group.”

What happened next isn’t clear; what is happening now, even less so.

Fifteen years ago, Tuleyev’s intervention was instrumental in enabling Evraz to consolidate its hold on the two Kemerovo steelmills it operates today – West Siberian Metallurgical Combine (Zapsib) and Novokuznetsk Metallurgical Combine – and he has continued to provide valuable help. US court papers indicate the nature of the help Governor Tuleyev is known for. What is likely is that he and his subordinates are engaged with both Evraz and ArcelorMittal to help themselves, the two companies, the region, and the local coalminers — in that order. If the heavily indebted Evraz wants to trade in a couple of mines for cash, it isn’t likely to reveal what the governor wants in return. And if the governor has decided to allow ArcelorMittal to close down Pervomaiskaya and Anzherskaya, then the acquisition of Yerunakovskaya-8 and Yubileinaya may be his precondition.

Nikolai Manshin, head of the Department of Coal Industry and Energy in the Kemerovo region government, said Friday that he has “no idea if ArcelorMittal closes down, buys, or sells any coal mines in the region.”

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