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By John Helmer in Moscow

Evraz, Russia’s largest vertically integrated steel group, has been ordered by the federal mine safety agency Rostekhnadzor (RTN) and a Kemerovo court to stop production at the Esaulskaya mine, in the Kemerovo region, until inspectors have resolved reported methane problems. Esaulskaya is one of several mines in the wholly owned Evraz subsidiary, Yuzhkuzbassugol (YKU — “South Kuzbass Coal”).

The closure was confirmed for CRU Steel News by Evraz spokesman, Alexei Agureyev. He said the mine stopped operating on Monday of this week, and the company does not know for how long operations will be suspended. He declined to give details of the mine’s monthly production of coking-coal and steam coal, claiming the company has coal stocks to tide it over the delay.

Three years ago, two other mines in the Yuzhkuzbassugol (YKU) group suffered methane explosion accidents. The first, at YKU’s Ulyanovskaya mine in March of 2007, killed 110 miners, a worst toll for a Russian mine disaster on record. Then in May of the same year, a methane explosion at YKU’s Yubileinaya mine, caused 38 fatalities.

Miners’ union sources in Kemerovo said at the time that company production and wage-related productivity targets for miners were indirectly responsible for the methane explosions, because the management targets encouraged miners to suppress methane detection systems in the mine shafts. By disabling the systems, the sources claimed, shutoffs of power when methane levels rose to the danger level did not occur.

In the latest case, a statement by the mine inspection agency indicates that there was a methane incident at Esaulskaya on January 20, but it caused no casualties or damage. The closure and compliance order have followed. Evraz has been identified in an earlier announcement by RTN as an inspection priority for this year.

Evraz, which is owned by Roman Abramovich, Eugene Shvidler and Alexander Abramov, has reported nothing on the safety shutdown at Esaulskaya. The last Evraz announcement on mine safety was a month ago, on December 24. That was when Evraz said “the families of miners killed in a blast at the Yestyuninskaya Mine of the Vysokogorsky Iron Ore and Processing Plant (VGOK) in Nizhny Tagil on December 23, will receive 1.9 million roubles each.” The company statement revealed that of this compensation amount, equivalent to $63,333, Rb300,000 ($10,000) would come from the Sverdlovsk regional budget, and Rb100,000 ($3,333) from the Nizhny Tagil municipal budget.

In last month’s Evraz’s mine disaster, nine miners were killed. The incident near the city of Nizhny Tagil, in the Sverdlovsk region, where Evraz operates its lead Russian steelmill, occurred at a depth of 180 metres. A local police source said that about 4 tonnes of ammonium-based explosive had detonated while being transported in shaft trolleys.

Mikhail Tarasenko, head of the Mining-Metallurgical Trade Union told CRU Steel News at the time that the accident “happened because of non-observance of technical regulations, specifically of those relating to transportation of explosives.” But he added it was too soon to say whether there was human error or fault on the part of the miners; or alternatively, a control system flaw for which the company and its management may be ultimately responsible. “It is too early to know the exact reason,” Tarasenko said. He also noted that earlier this year at the same Yestyuninskaya mine, 18 miners had been overcome by combustion gas, though not fatally. “I cannot say that Evraz systematically breaks the technical regulations;” Tarasenko said, “they pay close attention to labour protection, and miners wear modern protective outfits. But this accident needs detailed investigation”.

RTN was asked whether its inspection commission had reached a conclusion on the causes of the iron-ore mine explosion. At a press conference on Tuesday of this week, Vlkadimir Medvedev, the chief of the Urals region branch of RTN, said the miners killed were not responsible for the explosion. But he said the agency inquiry had determined that a short circuit causing a spark from a copper contact wire detonated the underground explosion. As to the cause of the short circuit, Medvedev said there had been negligence on the surface.

Total outlay in miner death benefits from Evraz — 9 miners x Rb1.5 million = Rb13.5 million ($450,000).

Evraz is Russia’s most heavily indebted steelmaker, and one of the most heavily indebted of the oligarch-owned companies. Total debt at the end of 2008 was reported in company documents at $10 billion. Most of the debt was incurred by a programme of premium-priced acquisitions of steel and other assets in the US during 2007 and 2008. When the crash came in the autumn of that year, Abramovich and Abramov applied to the Kremlin for several bailouts to protect their non-Russian assets from being forfeited to the foreign banks; and to support their Russian mills and mines in paying taxes and other obligations. By June 30 of 2009 – the last date for which Evraz has released an audited report – its debts were down to $8.5 billion.

There is no reference in the consolidated financial reports to mine accidents or their impact on Evraz revenue, profit, and dividends. The breakout of division financial results lumps coal-mining with iron-ore mining, and the group’s non-Russian mines (Ukraine and South Africa) with the Russian mines. The 6-month financial report for this mining division, covering the period to June 30, 2009, shows that there were earnings (Ebitda) of $94 million on sales revenues in the period of $594 million. Writeoff of mine equipment was worth $7 million in the period.

It isn’t known whether the survivors of Evraz miners, who have lost their lives in the past three years, have taken the company to court. In its last financial report, Evraz is reassuring to shareholders on its exposure. “The Group has been and continues to be the subject of legal proceedings, none of which has had, individually or in aggregate, a significant effect on the Group’s operations or financial position.”

No Moscow-based investment bank or brokerage has investigated and reported the benefits that accrue to the company from mine safety violations, net of the costs of death payments, cleanup, equipment writeoffs, and production losses. Instead, these houses have minimized the impact of mine accidents in relation to recommendations to their clients to buy Evraz shares.

A report this week by UBS analyst Maxim Moshkov suggests that Esaulskaya accounts for less than 15% of YKU’s aggregate output. At peak in 2008, Evraz produced 14 million tonnes of raw coal, including 9.1 million tonnes of coking coal. Of this total, YKU produced 13 million tonnes and 8.4 million tonnes, respectively. In 2009, the Evraz group of mines report output of just over 10 million tonnes of coking coal, and 4 million tonnes of steam coal. Total proved and probable coal resources of the YKU coal company, Evraz says, amount to 1.6 billion tonnes, including 1 billion tonnes of hard coking coal.

In his most recent published commentary on Evraz’s operating performance, issued in September, the group chief executive, Alexander Frolov, said: “Evraz’s business model proved its viability and resistance against the global downturn.”

The coalminers union in Kemerovo thinks differently. Anatoly Anikin, deputy chairman of Rosugleprof, analyzes the methane safety problem in the Evraz mines this way: “Certainly if people die, if accidents happen, then Evraz is culpable.”

“ The more important question is, why is the situation like that in the coal mining sector in general. There are several points here. The first point is that the controlling organs, including Rostekhnadzor, have a hapless policy. If you look at their rights, you can see that they can do almost nothing to the owner of the mine. Rostekhnadzor can only carry out an inspection once a year with a preliminary notice. If they discover violations and stop the mine, then the owner can challenge their decision in court and make Rostekhnadzor compensate for his losses. So they have to think twice! The Soviet controlling organs were removed completely — not a shadow of the former power and capacities [is left].”

“The second point is the deterioration of professionalism. Last month I met with Evraz representatives, and they had to admit they lack professional workers; the people they need just don’t exist! You can see that young people who even study at specialized colleges and institutions later go to work in some other sphere, leaving the mining sector without any hope for the future. In the Soviet times mining was prestigious: the miners were well paid, taken good care of, protected by the government. All this is gone.”

“The third point is the deterioration of the resource base. Nothing has been done for 20 years, and the safety margin is at zero. As to the Evraz holding, they are gradually re-equipping the mines with quite modern mining systems and machinery. But still, the staff problem is vital. Personnel have to be trained to work with foreign equipment. Why do you think methane is exploding? Because ventilation is a serious science. If you excavate faster than the air is cleaned, you’ll get accidents.”

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