- Print This Post Print This Post

By John Helmer in Moscow

Lakshmi Mittal buys loss-making Russian coalmines in the middle of nowhere.

Meerkats are among the most charming creatures in the animal kingdom, and they are expert at coping with the extremes of the Kalahari. The meerkat bands mark their foraging territories; but they are also opportunists — if rival bands don’t post guards, the territory will be raided for food. Unguarded, hapless meerkats may be kidnapped and eaten by their rivals, if the latter are hungry enough.

Lakshmi Mittal claims the charm, but Russians suspect him of less pleasant appetites. Accordingly, the recent record of his forays into Russia has been a consistent series of repulses from the domestic steelmaking and coal mining industries, backed by the federal government and the Kremlin:

http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=42571&sn=Detail

http://www.mineweb.com/mineweb/view/mineweb/en/page39?oid=37947&sn=Detail

This week Mittal announced he is trying to cross the Russian border again, this time with a sale and purchase agreement for two mid-Siberian coalmines, and one exploration deposit. The seller is the steelmaker, Alexei Mordashov, whom Mittal humbled and defeated with a surfeit of cash, and acumen, in mid-2006, when Europe’s largest steelmaker Arcelor was up for grabs, and Mordashov’s merger offer was beaten by Mittal’s.

This time, Mordashov has relieved Mittal of $720 million in cash.

According to Mordashov’s property Severstal, “Arcelor Mittal will acquire the assets for a total consideration of around $650 USD million in cash.” The ArcelorMittal announcement claims “a total consideration of US$720 million.” The $70 million difference reflects asset value, for which Mittal will pay minority shareholders in the mining companies that are being acquired.

According to his own press release, Mittal himself claims to be “pleased to be acquiring these mines which will provide an important and competitive source of coking coal supplies for our steel production, raising our self-sufficiency from 10% to 15%. This acquisition also helps ArcelorMittal establish a presence in Russia, a fast growing market for steel production.”

This has mystified Russian steel sources, since Severstal itself was unhappy at the costs of supplying its own northwestern Russian steelmill at Cherepovets, far from the mines it is now selling; while Russian mills much closer to the Kemerovo region, where Mittal is making his purchase, already have the coking coal they require.

Mittal’s nearest steel production plant is at Temirtau, in the Karaganda region of Kazakhstan, more than a thousand kilometres to the southwest. A proposed new Mittal minimill, being considered for the Tver region near Moscow, is even further away, and would depend on scrap, not coking coal, for its processing requirement. The Kriovorozhstal mill Mittal owns in the Ukraine is more than three times further to the west.

Mittal’s London spokesman was asked to clarify the geography, and explain what coking coal supply scheme Mittal must be thinking of. She did not respond by press time.

A leading Russian steelmaker told Mineweb the announcement may be Mittal’s last shot at entering the Russian market, but it is far from certain to succeed. “First of all they need permission of the antimonopoly agency to do the deal and this is a quite significant and difficult task in Russia. So I wouldn’t say they have already bought the assets. As to where they will sell the coal, I have no idea. The assets are lossmaking, and Severstal didn’t invest anything in these mines, or in the region — so it is very good deal for Severstal, per se. They are getting rid of a load here, and getting some cash instead. As to Mittal, this is their last and only chance to get any assets at all in Russia, and they will fight for it.”

In 2006, when Mordashov was trying to merge Severstal with Arcelor, his company set out an optimistic picture of the three assets now being sold to Mittal. The two operating coal mines, Beryozovskaya and Pervomayskaya, were said to have reserves enough for “at least 25 years of production” for the latter; 65 years for the former. No estimate was provided for the third asset which Mittal is now buying, the Zhernovskaya-3 exploration deposit.

In 2007, Beryozovskaya and Pervomayskaya together produced 1.77 million tonnes of coking coal concentrate; that amounted to 33% of total output of the product by the company’s mining division, Severstal Resurs. According to Roman Deniskin, General Director of Resurs: “this is a good deal for Severstal, allowing us to focus on the development of existing, strategically important assets, as well as invest new coal projects.” In other words, good riddance.

Michael Kavanagh, steel analyst for UralSib Bank, said there is no doubt Severstal has received a good price for the Siberian loss-makers, whose costs of production have doubled recently. “At the 2007 contract price of around $68/tonne of concentrate these assets were loss making. We note that Severstal reported production costs of $30/tonne of concentrate at these assets in 2005. This implies an increase in costs of over 100% in just two years.”

According to Kavanagh, “the Kuzbass assets, those sold to Mittal, were not considered strategic to the supply of coal to Cherepovets. The price offered by Mittal was a good one, similar to the price of Raspadskaya [acquired by Evraz]. The deposits are not considered as large, or of the same quality as the deposits at Severstal’s other coal operation, VorkutaUgol. VorkutaUgol is located closer to Cherepovets, so there are lower transport costs than KuzbassUgol. The assets sold need a lot of management time and attention.”

Severstal prefers, Kavanagh told CRU Steel News, “to take the proceeds and invest them in VorkutaUgol, where they feel the returns will be better and the operational synergies with the steel operations are higher. This is likely to be a short term positive for Severstal but raises serious questions about their ability to manage mining assets.”

There is no-one in the Russian steel industry today who disagrees, or who claims to detect Mittal’s clever streak.

A senior executive at one of the few Russian steelmills, which currently lacks all the coking coal it needs, said: “I don’t see a real reason for Mittal to buy these coal assets, especially knowing that they are loss-making. [There’s] only one idea – this is multi-step strategy, and this one is the first step to get acquainted with Russia, and then to do something more, or to show investments. Or else this is the part of some bigger deal, which is still not visible.

The source speculated that the two mines might export to Kazakhstan, “but I think [Mittal’s] Kazakhstan enterprise is self-sufficient with coal. I know for sure we are not buying from these mines.”

Lev Chesalov, an analyst with Rusmet, told Mineweb: “It is strange for Mittal to enter Kemerovo. They will definitely not be selling to Kazakhstan from there, as they have their own Mittal coal in Karaganda to supply their Kazakh enterprise.”

Leave a Reply