By John Helmer in Moscow

Confirmation this week by Mechel of its takeover of the West Virginia coal producer, Bluestone, has drawn fire from Moscow bank and brokerage analysts, who claim the price paid exceeds the value of the deal.

The Mechel announcement was issued on April 22, confirming details of a transaction which first commenced late in 2008, when Mechel made a cash down-payment, first reported at $425 million. An issue of about 80 million preferential shares, completed in March, was the second payment stage of the transaction. Although undisclosed to shareholders or to the US Secutiries and Exchange Commission, which regulates US-listed Mechel, the early reports indicated a valuation of Bluestone, owned by James Justice, of about $870 million. The share issue, it was speculated before this week, would amount to a 19% dilution for current shareholders.

Negotiations to finalize the deal appear to have continued between Justice of Bluestone and Igor Zyuzin, Mechel’s controlling shareholder and chief executive. According to the new release of the “definitive agreement”, Mechel says “”the aggregate merger consideration is $436 million paid in cash (including $36 million interest paid), approximately 83.3 million preferred shares, plus the assumption of approximately $132 million of net debt”.

Additional terms disclosed set out a more complex valuation of Bluestone, and substantially more to be paid for its acquisition by Mechel over the next five years. An analysis of the transaction by Uralsib Bank indicates that “if the value of the market value plus dividends paid in the next five years is less than $1585 million in five years’ time, Mechel will make a top up cash payment on the fifth anniversary of the deal. Finally, Mechel will pay an additional $3.04/ton for every ton of proven coal reserves in excess of 458 mln tons. Mechel’s expectation is that reserves could be 730 mln tons, implying that an additional $828 mln will be paid when the reserves are proven.”
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by John Helmer - Thursday, April 23rd, 2009
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April 18-19, 2009
Ben Fenton of the Financial Times, London, for “Standard’s new owner adopts hands-off approach”:
http://www.ft.com/cms/s/0/a8989b3a-2bb0-11de-b806-00144feabdc0.html

Letter

by John Helmer - Saturday, April 18th, 2009
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Deripaska’s cashflow chart

By John Helmer in Moscow

Clark’s Nutcracker is the name of a bird, a member of the crow family, and one of the most famous in the world for a feat of intelligence few human beings, even certified public accountants, can match.

Ornithologists have observed that this fellow can remember hundreds of locations where he has stashed away food. A relative, the American Scrub-jay, is on record as being able to steal from the caches of other birds, and re-hide its own, once it suspects they have been spotted by other birds. If only the problem of tracking down the money of United Company Rusal, and its controlling shareholder Oleg Deripaska, was ornithological, then locating it for repayment to creditors would require no more than banding the wrists or ankles of Deripaska, and a handful of his lawyers and accountants.

So far, however, Deripaska has managed to do a Clark, and give his creditors the bird.

This presents an urgent problem for at least 70 international banks, and several Russian ones, which are owed large sums of money by Rusal, and which neither the company, nor Deripaska’s personal holding Basic Element, acknowledges it can repay – at least, not any time soon. Deripaska holds 56.8% of Rusal, and 100% of Basic Element. Depending on how the sums are calculated, and whether they include interest, penalties, and lawsuit contingency provisions, as well as loan principal, Deripaska and his companies currently owe between $20 and $30 billion. That’s the biggest debt stash in Russia. And in the world, perhaps only Bernard Madoff is charged with owing more. According to an official statement this week from Olga Zinovyeva, first deputy general director of Basic Element, Rusal owes $16.8 billion, while the Basic Element holding is obligated for about $3 billion in non-aluminium business debts.
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by John Helmer - Thursday, April 16th, 2009
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By John Helmer in Moscow

For the first time since Russian goldminer listings began on the London Stock Exchange more than a decade ago, Russian shareholders have taken a major Russian goldminer to the UK regulator, alleging asset stripping and share value dilution, along with the charge that no justice is possible in the Russian courts. At the heart of the complaint filing is the sale of shares at what is alleged to have been ten times less than their fair value, and the valuation of gold reserves transferred at many muliples below book. The gold in question includes part of the most celebrated vein of unmined gold in Russia – the fabled Sukhoi Log deposit, in the southeastern Siberian region of Irkutsk.

A Moscow-based holding, Westway Alliance Corporation, with an 8% shareholding in the Irkutsk region goldminer Lenzoloto (“Lena [River] Gold”), filed its claim with the Financial Services Authority (FSA) on January 29.

The corporate targets identified in the complaint are the AIM-listed Polyus Gold (PLZL:RU, PLZL:LI), its management, and controlling shareholder, Mikhail Prokhorov. The FSA told Westway in March that an investigation has commenced. However, the FSA declines to respond publicly to questions about the case. The agency also warns complainants that its charter allows it to dispose of a complaint without informing anyone, unless the outcome is a disciplinary action posted on the FSA’s website. In 2007, the FSA says it issued just one disciplinary order or enforcement notice; in 2008, there were 8; and in 2009 so far, 2.

Westway told Minesite that between 2003 and 2006, Polyus took over the gold-producing and exploration assets of Lenzoloto at one price; then devalued them for transfer to Polyus; raised their value to achieve a significantly greater capital value for Polyus; and thereby deprived Westway as a minority shareholder in Lenzoloto of the substantial difference in value. Calculated on the basis of under-valued or reserves allegedly lost to Lenzoloto, Westway’s claim targets an amount estimated at $526 million; of that, its 8% stake should represent a claim to about $42 million.

In 2007, when Westway filed its initial claim in the Irkutsk regional arbitration court, the case was dismissed on a technicality. This was that, at the time of filing, and in the court papers, Westway failed to provide proof that it was the owner of Lenzoloto shares, although at the time the record of title indicated a nominee shareholder.
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by John Helmer - Wednesday, April 15th, 2009
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By John Helmer in Moscow

President Dmitry Medvedev will make his first visit to Africa in June, with stops planned in Egypt, Nigeria, and Angola. The disclosure of the Russian President’s first Africa trip was made in an interview with Business Day by Mikhail Margelov, the chairman of the Foreign Affairs Committee of the Federation Council, the upper house of the Russian parliament. Since December last, Margelov has been Medvedev’s special representative for Sudan, and the Kremlin’s first roving troubleshooter for Africa.

“Russia is back in Africa,” Margelov had said on arrival in Khartoum in January. Since then he has also toured the Darfur region, and met with Arab mediators in Cairo, Beirut, and Qatar to help bolster international efforts in the Sudanese conflict.

Margelov told Business Day that he recently held talks in Moscow with Awad Ahmed Al-Jazz, a special emissary from the Sudanese President Omar al-Bashir.

Russia is able to play the “honest broker role” in the Sudan, Margelov said, because Russia does not carry the burden of the colonial ties of the UK; the multi-billion dollar investment stakes of China; or the ideological positions of the US. Margelov said he is trying to build a balanced approach, and gather information from all of the Sudanese political factions. He said he has already held talks with Minni Arcua Minawi, a former rebel and leader of one of the Sudanese Liberation Army factions, who signed the Abuja peace settlement of 2006.

Margelov told Business Day he expects to meet other Sudanese opposition groups and neighbouring governments in Chad, Uganda, and Kenya, probably after Medvedev’s visit to the region.
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by John Helmer - Tuesday, April 14th, 2009
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By John Helmer in Moscow

If the senior management of Alrosa, the world’s number-2 diamond miner, mounted the review platform above Lenin’s tomb in Red Square, and stood in line for a two-hour military review, the goings-on inside the corporate executive suite wouldn’t be any clearer. But the body language might signal whether the company’s boss, Sergei Vybornov, is out of line, terminally.

But without that, all that can be read into an announcement from last Friday’s session of the Executive Board, is that the company management had an important visitor on Friday, and that after he had left, all that could be announced was uncertain.

Alrosa, the Russian diamond miner, is to reduce its dollarised production target for this year by 15.9%, according to the company’s record of an Executive Board meeting, held at Mirny, in the Sakha republic, on Friday.

The future of CEO Sergei Vybornov is also being considered by the company board, according to sources, who have told Polished Prices that Vybornov has agreed to step down once a replacement has been found for him. The board has also agreed, according to these sources, that Sakha President, Vyacheslav Shtirov, will not be Vybornov’s replacement.

The board’s new communique says nothing explicitly about the long-running feud between Vybornov and Shtirov. However, it notes that the Executive Board, a senior management body, included Shtirov in its deliberations on Friday. This is unusual. Shtirov is formally a member of the company’s Supervisory Board, equivalent to a corporate board of directors, which includes members nominated by the shareholders, and is chaired by federal Finance Minister, Alexei Kudrin. The last Supervisory Board meeting was held on December 30. The last public notice of an Executive Board meeting, convened on December 12, did not include Shtirov.
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by John Helmer - Monday, April 13th, 2009
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By John Helmer in Moscow

A report issued this week warns that Russian steelmills may try to export their way out of the current global economic crisis, exploiting their low-cost power and raw material advantages, and creating a potential glut in global steel supplies for another twelve months or longer. Steel analysts from the Swiss bank UBS produced the report on April 8.

“We see a severe looming export threat from Russia and its neighbors for several reasons”, UBS claims to clients. “The ruble has devalued ~30% vs the US dollar and domestic demand has fallen sharply with energy’s slump. The CIS are among the lowest cost producers and are running at ~65% capacity utilization. Exports are a great solution to their woes, and their prices are very competitive with global mills given low freight costs. We believe the worst-case scenario of a global mkt share battle is emerging.”

Included in the analysis of an export surge is steel from the Ukraine, Kazakhstan, and Belarus. “The CIS is a major global steel exporter, particularly to both the US and Europe. We believe the region has the capacity, motivation, and low costs to be a sizable export force in 2009. UBS estimates capacity utilization in the region is about 65% but generally weak domestic markets and balance sheets are motivating producers to try to return to full utilization…We estimate 50-60M tonnes available for export on an annualized basis, which eclipses recent Chinese exports at a run rate of 12-15M tonnes, and approximates the maximum annual exports from China of 52M tonnes in 2007.”
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by John Helmer - Friday, April 10th, 2009
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By John Helmer in Moscow

Mechel today confirmed reports that the company is the target of a shareholder lawsuit, alleging that the company and its controlling shareholder, Igor Zyuzin, have failed to disclose material information affecting Mechel’s share price to the market.

Before news of the lawsuit filed Wednesday reached the market, Mechel’s share rose 10% on the day to $5.38. It has risen 20% over the past week, and 68% over the previous month. The steel, coal, and ferroalloy group’s current market capitalization is $2.2 billion.

In a report released Monday on Russian prospects in the global steel environment, Rob Edwards, Renaissance Capital’s steel analyst, said: “We have cut our target price for Mechel from $13/share to $9/share, reflecting current market conditions and 2009 uncertainties. We think Mechel represents the most attractive play on a risk/reward basis in the Russian metals and mining sector for investors seeking maximum upside potential among riskier names.”

Wire services reported overnight that the new lawsuit names Mechel and Zyuzin as co-defendants. The plaintiff is reported to be Dean Frederick, a Mechel shareholder. However, the lawfirm initiating the claim, Coughlin Stoia Geller Rudman and Robbins, is believed to be pursuing a class action, on behalf of a much larger group of minority shareholders of the New York Stock Exchange (NYSE) and US-regulated Russian steelmaker. The lawfirm, which has offices throughout the US, lists 39 pending class-action cases involving securities market claims. The Mechel filing is not yet listed on the law firm’s website.

Coughlin Stoia’s website reports that it is currently investigating the Bernard Madoff securities fraud “on behalf of large institutional and individual clients”, and advertises for shareholders who believe they may have been hurt by securities fraud to make contact.
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by John Helmer - Thursday, April 9th, 2009
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By John Helmer in Moscow

As the curtain goes up this week on Russia’s newest shipbuilding company, the 100% state-owned United Shipbuilding Corporation (USC), maritime sources say the curtain may be coming down on St. Petersburg yard, Baltic Plant (“Baltiysky Zavod”).

Baltic is owned by the United Industrial Corporation (UIC) of Sergei Pugachev, who also owns Northern Shipyard (“Severnaya Verf”) in St. Petersburg. For some time Pugachev has been hoping to consolidate the Baltic works on the territory of Northern, and then dispose of the Baltic yard’s land for real estate development. The city government of St. Petersburg, which holds a golden share in Baltic, is vetoing that idea for the moment. But Baltic currently owes an estimated Rb4.5 billion ($132 million), and its newbuild order-book and current cashflow are running down. State shipyard officials, who announced the formal chartering of USC on April 7, have been contemplating a takeover of Northern, if Pugachev lowers his price. Baltic, they say, hasn’t been part of their plan.

The Baltic yard, Russia’s main producer of icebreakers, submarines, and tankers, seemed a better prospect in 2004, when it was owned by the ICT group, a St. Petersburg-based partnership headed by Alexander Nesis. It had been Nesis’s ambition, hesaid at the time, to leverage his 18% stake in Northern, and with Kremlin backing, to merge the two yards under ICT’s control.

A year earlier,when Nesis announced his bid to acquire the rest of Northern from its then owner Boris Kuzyk, a former advisor to the Yeltsin administration, he claimed: “there are several players on the Russian [shipbuilding] market, who are not strong enough, and for whom it is difficult to compete with the main competitors – foreign companies. The weaker Russian producers should not compete against each other, but should concentrate their resources. This will help solve the problem of pre-financing in developing their products. We want to establish situation of an absolute technological advantage, when noone else besides the holding will be able to fulfill the contract.”

At one stage in the conflict, sensitive documents were leaked that revealed serious supply, standard, and contract violations in Northern’s performance of a top-secret contract to build destroyers for the Chinese Navy.
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by John Helmer - Wednesday, April 8th, 2009
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By John Helmer in Moscow

Yury Trutnev, the Russian minister in charge of Russia’s oil and mineral licences, is the top-earning member of Prime Minister Vladimir Putin’s cabinet for another year, according to official income data just released.

For 2008, Trutnev has declared earnings of Rb369.94 million, equivalent now to $10.9 million. Presiding at the ministry headquarters, a stone’s throw from the lions’ cage at the Moscow Zoo, Trutnev was first appointed to his federal job in March 2004. He has been well fed since then. In 2005, according to Trutnev’s report to the government, his earnings totaled Rb211.4 million (then $7.9 million). That was double his first official earnings report for 2004, and almost eighteen times more than the next-placed official, Minister of Transport, Igor Levitin, who reported 2005 income of Rb12 million ($446,482). In 2005, Trutnev’s income was four times larger than the incomes of all the other cabinet ministers combined. In 2008, his pocket is forty-two times deeper than Putin’s and President Dmitry Medvedev’s combined; it is 4.2 times larger than the combined earnings of his cabinet colleagues.

Trutnev’s name in Russian refers to the short-lived bee , whose only work in the hive is to fertilize the queen bee, before he dies. By association, the Russian word “truten” — literally, a drone — has come to mean someone who lives at another’s expense.

There is nothing unlawful about Trutnev’s income, his spokesman has explained, for it represesents deferred earnings from a company he used to own. This was called EKS, a privately owned concern which says it trades in food and runs supermarkets in the central Russian region of Perm, Trutnev’s birthplace. Trutnev, according to his ministry, sold out of EKS in 2006, and has been receiving instalments from the deal since then.

According to the official biography Trutnev posted on a personal website, he was born into a family of oil-industry workers in Perm. He graduated from university as a mining engineer, and after a brief spell working on oilfields, he returned to Perm to work as an administrator of the local sports organization. He was well-known in sports circles as a contestant and instructor in various forms of wrestling and oriental martial arts. As the Soviet Union crumbled, he and his fellow sportsmen went into business together, creating EKS to import Swiss foodstuffs, pharmaceuticals and other goods on order from the region. Russian press estimates suggest that by the mid-1990s, this had made him a comfortable fortune, and he moved into politics, first as a municipal councilman in Perm city, then mayor, and finally, in the year 2000, governor, replacing the incumbent who fallen out of favour with the Kremlin.
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by John Helmer - Wednesday, April 8th, 2009
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