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By John Helmer, Moscow

Igor Zyuzin’s desperately indebted steel and coal-mining group Mechel is negotiating the sale of a 25% shareholding stake in Mechel Mining, his coal division, for $1.25 billion. That’s a fraction – maybe half — of what it was worth two years ago.

Would such a loss of capital value, and the still uncounted costs of Mechel’s unfinished, non-operational ElgaUgol coalmine in the Sakha republic have materialized if, instead of Zyuzin (left), the Kremlin had decided in October 2007 to award the project concession to the high bidder at the time, Lakshmi Mittal (centre)? Does anyone in the Kremlin believe today that the discount for ElgaUgol which Baosteel, China’s leading steelmaker, is about to extract from Zyuzin has been worth the six-year wait? Will President Vladimir Putin, who has been in charge of the milestones of wealth accumulation and loss marking Zyuzin’s career so far, instruct the government’s Control Commission to vote in favour of this strategic resource acquisition by the Chinese? And if the Chinese are acceptable as coalmining partners now, why weren’t the Indians in 2007?

The questions arise because approval of the Baosteel purchase, if it is finalized in negotiation over the next week, must go to the Federal Antimonopoly Service (FAS); it staffs the cabinet-level commission whose approval is required for foreign acquisitions of strategic assets such as this one. For the time being FAS sources are saying as little as possible. They concede they are aware of the transaction, but no applications have come to the FAS for its review yet. Head of the Control Commission staff, Armen Khanyan, isn’t answering his telephone or his email on the subject.

The story of how Mittal was the high bidder for ElgaUgol, and was disqualified on spurious grounds by the Russian State Property Fund, was told here. Mechel’s chief operating officer said at the time: “Two or three weeks ago, no one had any understanding of the intentions of Arcelor Mittal. But at many meetings – from the lips of the President and the Prime Minister – there has been the message that ElgaUgol is a strategic asset which only a Russian investor should operate.” Eliminating Mittal from the bidding was, he added, “in our national interest”.

So what now?

Mechel sources have reported the negotiation with Baosteel to a Moscow newspaper, which published the news today. Last month Baosteel and Mechel announced a new contract with Baosteel’s resource division for a substantial increase in their trade in coking coal concentrate. On March 18 the two companies signed terms for delivery of 960,000 tonnes over one year, with further annual extensions optional. Mechel has been shipping about one-quarter of that volume in previous years.

For the time being Mechel is not confirming officially that it is discussing the share sale with Baosteel; it is saying that talks with more than one interested buyer have been held. Finalization talks with the Chinese are expected when a mixed Russian government and business delegation goes to China next week.

Mechel’s operational summary for the past year, released in January, reports the group sold a total of 11.5 million tonnes of coking coal concentrate, 2.59 million tonnes of that to its own steelmaking plants. The newly contracted sale to Baosteel would represent about 10% of third-party sales;precise export volumes and destinations for 2012 are not available from the company. Dwindling domestic steel production continues to cut into the Russian coking coal price, which has fallen by 2.7% over the month of February.

Mechel is struggling with debts totalling more than $9 billion, and with demands from its banks to cut its debt to earnings ratio at a time when falling commodity prices and weak demand for both steel and coal allow for little growth in sales and earnings. An abbreviated history of how Zyuzin managed his company to the point of ruin can be read here.

By last September the outcome forced on Zyuzin by his banks was the announcement that Mechel was looking to give away most of its foreign steelmills, and to sell a stake in Mechel Mining, the most valuable of the assets the group has left, at least 40% of which is pledged against Mechel’s loans. The firesale was announced after stockmarkets in London, Frankfurt and Hong Kong showed no interest in a separate listing of the mining division.

Chinese and South Korean (Posco) interest in Mechel Mining has been discussed with Zyuzin before, but he has resisted the cut-price offers on the table to date. A year ago, the asking price for 25% of Mechel Mining was between $1.5 billion and $2 billion.

According to Alfa Bank steel analyst Barry Ehrlich, in a report to clients this morning, “valuation-wise, the price [$1.25 billion] looks reasonable.” He speculates that some of the debt owed by Mechel Mining may be transferred to the parent company as one condition of the sale. “Selling the asset would allow the company to cut outstanding net debt ($9.4bn) by 13% and reduce interest payments by approximately $70-80m,” Ehrlich notes.

Valentine Bogomolova, steel analyst for Uralsib Bank, reports that a deal with Baosteel at today’s price “is a sign of Mechel’s extremely stretched position. Recently the company announced an agreement for covenant holidays with international banks and is actively discussing such an agreement with Russian creditors…A bidding price that is below the target previously set by management can be seen by the market as a sign of Mechel’s desperate position with debt servicing and management’s pessimistic outlook on coking coal price dynamics.”

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