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By John Helmer, Moscow

Russia’s largest coking coal producer independent of the major steel groups is for sale, as the two controlling shareholder groups — Gennady Kosovoy and Alexander Vagin, who run the management, and the Evraz group — have engaged investment banks to find a buyer for their combined 80% stake in the company. At least, this is the appearance of the story, after Kosovoy and Vagin announced their intention to sell just a few days after Evraz beat them to it, and following the former owner-managers’ declaration of their unwavering intention to remain precisely where they are.

Interfax issued the first confirmation of the double sale offer. The banks and brokerages in Moscow have followed with an analysis of the likelihood that Novolipetsk Metallurgical Combine, owned by Vladimir Lisin, Mechel owned by Igor Zyuzin, or another domestic steelmaker will acquire control of Raspadskaya, at a price estimated to be not less than $6 billion, if the buyer pays the normal takeover and control premium. However, the news has triggered an immediate sell-off of Raspadskaya shares, as the market cut 6.3% off the share price in Thursday trading. As the share price continues downward today, the market capitalization is now at $5.4 billion, and the shares for sale are worth $4.3 billion.

If the market smells a forced sale, and a takeover plot by a newly designated holder of the Raspadskaya coal concession, then the share price can be expected to fall even further until it reaches the takeover price the new man and his bankers have agreed is affordable for them.

Lisin and Novolipetsk are the least indebted of the major Russian steelmakers at present. Counting its cash against total debt, Novolipetsk is carrying a net debt of $1.5 billion, with a debt to earnings ratio of 0.5. Evraz, owned by Roman Abramovich and Alexander Abramov, leads the debt table of the Russian steelmakers, with net debt of $7.2 billion, and a ratio of 3. Mechel’s debt is currently at $6.8 billion; its ratio is 3.4. Severstal’s net debt is $4.1 billion, its ratio 1.3; while Victor Rashnikov’s Magnitogorsk (MMK) has debt of $3 billion, with a ratio of 1.9.

If Russian business follows the calculus of conventional financial modelling, which the Moscow bank and brokerage analysts rely on for their daily reports to clients, Raspadskaya is affordable only to Lisin, or perhaps Mechel, or, at a remoter probability, to Rashnikov.

On the other hand, now that Russia’s state-backed investment banks – VEB, VTB, Sberbank, EMB, and Gazprombank – can draw on a capacious supply of cash to finance strategic asset deals, if they are given the go-ahead by Prime Minister Vladimir Putin and Deputy Prime Minister Igor Sechin, the reallocation of the coking coal concession won’t be following the regular laws of money.

Raspadskaya is the leading coking coal supplier in the country, and it is forecasting 8.5 million tonnes of raw coking coal output for this year. That is up almost 20% over last year’s level. The 2009 level, before a double methane blast destroyed mine-1 on May 9, 2010, was 13.6mt. The company’s output target rises to 12.8mt in 2012, 15mt in 2013, and 18.5mt in 2015. Until last year’s accident, which killed 90, Raspadskaya accounted for 17% of coking coal supplies to the domestic steelmills. Here is the background.

The company announced late in February that it plans to invest $976 million over the next five years out of company cash, rather than seeking higher debt levels. Raspadskaya’s post-accident debt is $145 million.

A month ago, Kosovoy and Vagin, who have spent most of their careers at Raspadskaya, were confidently predicting the resumption of export sales later this year, as Russian coking coal takes market share in Asia away from the Australians. The target cash cost for production of coking coal concentrate, according to Raspadskaya, will be $35 to $36 per tonne this year, and not more than $30 per tonne from next year; this compares with an estimated $50 to $80 per tonne cost for Australian producers competing for the Chinese market.

The abrupt announcement that control of Raspadskaya is now for sale indicates friction between the control shareholders over the future of the company, and the possibility that another major Russian group aims at taking the coalminer at a discounted price for the assets. Evraz originally bought 40% in Raspadskaya in 2005 with the aim of merging it with the group’s other coal production assets. But the merger negotiations failed, and Raspadskaya remains a separately listed company; 20% of the shares are free floating on the Moscow and London stock exchanges. Without Raspadskaya, Evraz’s coal-mines already produce roughly enough coking coal to meet its mill needs.

Russia’s metals oligarchs got to where they are by targeting the steelmills they wanted with a blockade of their supplies of raw materials, iron-ore and coal; with bankruptcy through their debts to the electricity and gas utilities, or by barring their access to markets, either through the railroad or the ports. For these reasons, vertical integration of the privatized Russian steel groups required a circle of defensive asset holdings to protect the profit centres against counter-attacks from rivals.

A report by UBS steel analysts, Kirill Chuyko and Alexander Morozov, includes these two diagrams of how the sale of Raspadskaya would affect the supply of coking coal to the three steelmaking contenders for Raspadskaya:

The Evraz disclosure last month that it wanted to sell out created pressure on Kosovoy and Vagin, who hold a first right of refusal, to raise the finance to buy the 40% stake. They aren’t saying what message they received from the state banks. But their response this week that they too want to sell has been a surprise. It has triggered skepticism that a Russian buyer will agree to buy both stakes; that in turn has led to the speculation that Kosovoy and Vagin are playing tit for tat with Abramovich and Abramov. No foreign steel or coal company would be permitted to buy into the strategic asset. So who, if anyone Russian, would want, or be capable, of buying Raspadskaya now?

Novolipetsk currently controls just 25% of its coking coal requirement, while Evraz and Mechel are 100% self-sufficient; Magnitogorsk holds about 50% of its coking coal supplies through the Belon subsidiary. Severstal is fully self-sufficient. Mechel is a contender to buy, since it is planning to spin off as a separately listed company its coalmining assets. A merger with Raspadskaya would give Mechel a ready-made international listing for the coalmine group, if it can raise from the Russian state banks enough cash to buy Kosovoy, Vagin and Evraz out.

Lisin has published much detail in his plan for Novolipetsk to acquire self-sufficiency in coal supply by building new mines in the northwestern Komi region and elsewhere. Counting the cost of licences and mine development expenditure, these remain less than half the cost of the likely going price for Raspadskaya, even if Raspadskaya’s coal is being mined right now, while Lisin must wait at least three years for his new coal to materialize. So Lisin’s preference is likely to be that he will sit on his hands.

Nikolai Sosnovsky, steel analyst at Uralsib bank, reports today that he expects “the deal will be cancelled and Raspadskaya will remain owned by its present shareholders. However, given that Gennady Kozovoy decided to sell his stake, a deal will likely appear on the horizon at some point in time.”

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