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By John Helmer in Moscow

Evraz, the most heavily indebted of Russia’s steelmakers, has refused to respond to questions about disclosures in its annual financial report for 2008, released on April 30, that the Russian group has pledged virtually its entire shareholding stakes in its North American assets, and in its lead longs mill, West Siberian Metallurgical Combine (ZSMK, Zapsib), to secure repayment of loans and refinancings of the debt incurred to make the asset acquisitions.

Evraz is controlled by Roman Abramovich, and run by former controlling shareholder, Alexander Abramov.

Evraz investment relations spokesman Sergei Lavrinenko was asked to clarify Russian media reports of the asset pledges. He then refused to respond by email or telephone. The disclosures are highly sensitive, because of fears, widespread throughout the Russian steel industry, that the Russian government may take shareholding control of steelmakers, which prove unable to meet the heavy debts they have run up, particularly in premium-priced acquisitions in Canada and the US.

At page 35 of the 44-page report, Evraz reveals, for the first time, details of the state bank bailout loan from Vnesheconombank (VEB), which late last year saved Evraz from default. VEB is chaired by Prime Minister Vladimir Putin. According to the Evraz report, the VEB loan “is granted in 5 tranches of U.S.$201.3 million each to partially refinance the company’s principal installments falling due in 2008 and 2009 under the US$3,214 million syndicated loan borrowed in November 2007. The loan is secured with pledge of 99.999993 % of ZSMK shares and assignment of receivables under certain ZSMK and NTMK export contracts, and bears interest at 12-month LIBOR plus a margin of 5% per annum. Each tranche is repayable on the first anniversary of its respective disbursement date, with the final repayment in December 2010. On December 10, 2008, Evraz Group S.A. entered into a U.S.$800 million loan with VEB. The full facility amount was utilised on December 12, 2008. The facility is secured with pledge of 100% of shares in Evraz Inc. NA Canada, all movable and immovable property of Evraz Inc. NA Canada, as well as suretyships provided by NTMK and ZSMK, and bears interest at 12-month LIBOR plus a margin of 5% per annum. The facility is repayable in one instalment in December 2009. It was utilised to refinance the two U.S.$400 million bridge facilities arranged in June 2008 for the acquisition of the IPSCO Tubulars business from SSAB.”

When Evraz first announced the takeover from a Swedish group of the IPSCO steelmills in North America, the deal value — after allowing for the sale of the pipe assets to Russian pipemaker TMK — amounted to $2.45 billion. “This deal will increase our exposure to the attractive energy and infrastructure sectors throughout the region,” Evraz chief executive Alexander Frolov said publicly at the time. But even before this claim and deal, there had been warnings from Russian steel analysts. According to Michael Kavanagh of Uralsib Bank, “with so many acquisitions in so many different regions, investors are likely to have growing concerns over the ability of Evraz to integrate the acquired assets, achieve synergies and operational efficiencies.”

Before this disclosure, Evraz had reported that the security pledged for the VEB bailout was trading revenue of its Russian mills, Zapsib and Nizhny Tagil (NTMK).
The new Evraz report lists the group’s assets as follows: “nine steel plants: NTMK, ZapSib, NKMK, Evraz Vitkovice Steel, Rocky Mountain Steel and Claymont Steel (both are parts of Evraz Inc North America), Evraz Inc NA Canada (former IPSCO Canada, acquired in June 2008), Dnepropetrovsky Metallurgical Zavod (DMZ, acquired in December 2007) and Highveld Steel and Vanadium Corporation (acquisition completed in April 2007); Highveld is also a leading vanadium producer; steel rolling mills: Evraz Palini e Bertoli, Oregon Steel Portland and Camrose Pipe Corporation (both are parts of Evraz Inc North America); five iron ore mining and processing facilities: KGOK, VGOK and Evrazruda in Russia, Sukha Balka in Ukraine and Mapochs Mine in the South Africa; coal mining assets: Yuzhkuzbassugol (acquired in June 2007) and Mine 12; one of the world’s leading producers of vanadium alloys and chemicals for the steel, chemical, and titanium industries: Strategic Mineral Corporation (Stratcor); together with various trading and logistical assets.”

Also newly disclosed, Evraz has pledged its Colorado and Oregon-based mills to secure repayment of two US institutional loans. The Evraz report says: “On August 14, 2008, Evraz Inc. N.A. (formerly Evraz Oregon Steel Mills Inc.), obtained a US$725 million syndicated loan. The transaction includes a US$550 million five-year asset based revolving credit facility and a US$175 million five-year term loan facility. The facilities bear interest at the floating rate of LIBOR plus 2.5% p.a. and LIBOR plus 3.25% p.a. respectively and are secured with pledge of various assets of Evraz Inc. NA and its subsidiaries. The revolving credit facility was jointly led by RBS Greenwich Capital and GE Capital with RBS Business Capital and GE as co-collateral agents.”

Evraz reports that as of December 31 last, its total indebtness was $9.986 billion. Debt due for repayment during 2009 was reported to be $3.9 billion.

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