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By John Helmer in Moscow

Prospectuses are like lap dances. It’s necessary to keep one’s distance so that the baser instincts don’t cloud one’s better judgement.

In a recent West Country court ruling, a lap-dancing bar lost an appeal of the revocation of its adult entertainment licence. The club claimed its lap-dancers were lawfully adhering to the “three-feet rule”set down in its licence. To keep the dancers entertaining rather than prostituting themselves, the rule requires the customers to keep three feet from the performers. But the club had found a loophole in the regulation. This allowed the girls to get very close if they weren’t performing their licensed dances. In the clinches, the club testified the girls were doing no more than exercising their freedom of association, without commercial benefit for the bar. The court didn’t buy it.

Now comes Evraz, Russia’s largest steelmaker, and the world’s number-10 in the industry, owned by Roman Abramovich (left image) and Eugene Shvidler of London; Alexander Abramov (right image) and Alexander Frolov. No lap-dancers this lot – unless you fancy giving their North American subsidiary $650 million in unsecured money.

Evraz North America has issued a prospectus for a raising of $650 million in loan notes. According to a presentation by Mike Rehwinkel, chief executive of Evraz Inc.North America (EINA), the new funds will go towards refinancing just over $3 billion in the existing debts of the North American division of the Russia-based group.

Credit Suisse and Barclays Capital are the lead managers, with BNP Paribas, Commerzbank, Credit Agricole, Deutsche Bank, ING, Natixis, Royal Bank of Scotland, and VTB among the underwriters. They will take $20 million in fees and commissions from the amount raised.

The offer documents provide a more detailed picture than has been publicly available before of the $5.1 billion in acquisitions Evraz made in the US and Canada, starting with Oregon Steel Mills in 2007 for $2.3 billion; Claymont Steel in 2008 for $413 million, followed that year by the Canadian assets of IPSCO at $2.4 billion. There are 14 plants in all — five in the US, nine in Canada. Reorganized operationally this year into three product divisions for flat steel, longs and tubular products, with a single Evraz brand name, EINA says it is the largest rail and large-diametre pipe (LDP) producer in North America, with 3.9 million tonnes of rolled steel capacity, 2.7mt of melt shop capacity, and 2.1mt of pipemaking capacity.

Current production levels are running at 60% of capacity at Oregon Steel (US); 89% at Claymont (US); 93% at Regina (Canada); and 56% at Surrey (Canada). In pipemaking, the group’s mill production ranges at present from 16% to 88% of capacity. There is no pipe production at all for the moment from the 200,000-tonne capacity mills at Oregon.

In 2009, EINA group facilities produced approximately 11% of its scrap metal needs, 78% of the slab supply requirements, and 100% of the billet requirement.

The product portfolio EINA turns out for sale comprises an array of specialty and commodity steel products including discrete plate, coil, welded and seamless pipe, rail, wire rod and reinforcing bar and hollow structural sections. Most of these products are sold to the oil and gas, railway and infrastructure (e.g. bridges and power transmission towers) sectors.

In 2008 the EINA group reported $5.1 billion in sales. This dropped to $2.4 billion in 2009. In the first half of this year, sales revenues amounted to $1.4 billion, up 8% on the year earlier. EINA admits it is still loss-making, with a deficit of $46.2 million in the six months to June 30; this compares with $106.8 million lost in the first half of 2009. In the full year 2008, EINA ran a profit of $147.3 million.

Lenders who enjoy the excitement of pinning their dollar-bills to the garters of lossmaking companies have been told in the prospectus that “the steel market began a gradual recovery in the second half of 2009 in line with global economic activity; however real demand for steel products remained below levels prevailing before the crisis and the extent of the recovery remains uncertain.” Also: “overall steel prices gradually started to recover during the third quarter of 2009 due to increases in apparent demand driven by improvement in business confidence, higher levels of economic activity and falling inventories. However, prices have not sustained a complete recovery.”

On the other hand, here are skirt-lifters from chief executive Rehwinkel:

• “High margin specialty steel focus with leadership in key rail and LDP markets
• Revenue visibility driven by recurring rail projects and, historically, long lead time LDP projects
• Integrated supply chain with a focus on production of higher value products
• Strong, long-term relationships with stable customers
• Sustained profitability through the cyclical trough
• Ongoing support of Evraz Group SA, a leading global steelmaker, which has invested over $5 billion create a leading North American steel business.”

It is not quite clear how “sustained profitability through the cyclical trough” can be squared with six quarters of loss-making. According to Rehwinkel, “steel prices have increased since the beginning of 2010 and are significantly improved from 2009 lows.” According to the prospectus, “we expect our steel production (in terms of tons sold) for 2010 to be at higher levels than in 2009, but not at 2008 levels.”

For a supplier of pipes to the oil and gas industry, the big, best news is new demand for drilling exploratory and production wells, and moving the resource from wellhead to market. One of the indicators is the exployment of drill-rigs across US and Canada. “The North America rig count surged to 2,042 in August 2010, ~110% higher than the trough of 974 in May 2009”, Rehwinkel says in this month’s roadshow presentation.

The demand for new steel for the railroads is less keen. Before 2009, says Rehwinkel, “the railroads were aggressively pushing track productivity, and as a result were ramping up replacement rail and not installing much new rail [read lower demand for EINA products].

Given the drop in demand between 2009 and 2010, it is expected that replacement rail will drop in the near-term as the network age gets extended [read even lower demand].”But the good news is that this won’t last forever. “Over the next few years, demand is expected to increase gradually, not an accelerated recovery. Medium-term demand expected to pick up due to track productivity and capacity concerns for the railroads – forcing focus on building new track. By 2020, new rail demand is expected to exceed historical rates while replacement rail is expected to be in line with historical rates.”

Time can be a tease. According to the prospectus, the term of the new loan notes expires in 2017.

The company says the biggest risks the steel and tubemaker is now facing in North America include over-capacity in North American steel, and a credit squeeze on customers to buy steel; imports from countries which are currently restricted in Canada by anti-dumping measures that come up for review in August of 2011; and rising emission control and environmental compliance costs, especially at Claymont, which is currently subject to a court ordered clean-up.

The prospectus also notes the possibility of conflicts of interest with the Russian base of the company, which supplies most of the slab required for EINA’s processing. “Evraz Group may determine to reduce budgeted contributions to, or investments in, us for our capital expenditures or other operating expenses, increase such contributions to or investments in our affiliated companies, allocate a particular business opportunity to itself or another affiliated steel producer, or any combination thereof.”

The document also notes that “our pension obligations currently exceed our pension assets, and, accordingly, a portion of our pension plans is unfunded.”

Less than two-thirds of the company’s workforce is currently unionized; the Oregon and Claymont plants are non-union; the Colorado mill is organized by the US Steelworkers Union. According to the risk summary, “we expect to begin negotiating a new collective bargaining agreement in early-2011; however, there can be no assurance that we will reach an agreement with the union on terms acceptable to us or at all…Furthermore, trade or labor unions could seek to organize some or all of our non-unionized workforce.”

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