By John Helmer in Moscow

Evraz, the most heavily indebted of Russia’s steelmakers, has refused to respond to questions about disclosures in its annual financial report for 2008, released on April 30, that the Russian group has pledged virtually its entire shareholding stakes in its North American assets, and in its lead longs mill, West Siberian Metallurgical Combine (ZSMK, Zapsib), to secure repayment of loans and refinancings of the debt incurred to make the asset acquisitions.

Evraz is controlled by Roman Abramovich, and run by former controlling shareholder, Alexander Abramov.

Evraz investment relations spokesman Sergei Lavrinenko was asked to clarify Russian media reports of the asset pledges. He then refused to respond by email or telephone. The disclosures are highly sensitive, because of fears, widespread throughout the Russian steel industry, that the Russian government may take shareholding control of steelmakers, which prove unable to meet the heavy debts they have run up, particularly in premium-priced acquisitions in Canada and the US.

At page 35 of the 44-page report, Evraz reveals, for the first time, details of the state bank bailout loan from Vnesheconombank (VEB), which late last year saved Evraz from default. VEB is chaired by Prime Minister Vladimir Putin. According to the Evraz report, the VEB loan “is granted in 5 tranches of U.S.$201.3 million each to partially refinance the company’s principal installments falling due in 2008 and 2009 under the US$3,214 million syndicated loan borrowed in November 2007. The loan is secured with pledge of 99.999993 % of ZSMK shares and assignment of receivables under certain ZSMK and NTMK export contracts, and bears interest at 12-month LIBOR plus a margin of 5% per annum. Each tranche is repayable on the first anniversary of its respective disbursement date, with the final repayment in December 2010. On December 10, 2008, Evraz Group S.A. entered into a U.S.$800 million loan with VEB. The full facility amount was utilised on December 12, 2008. The facility is secured with pledge of 100% of shares in Evraz Inc. NA Canada, all movable and immovable property of Evraz Inc. NA Canada, as well as suretyships provided by NTMK and ZSMK, and bears interest at 12-month LIBOR plus a margin of 5% per annum. The facility is repayable in one instalment in December 2009. It was utilised to refinance the two U.S.$400 million bridge facilities arranged in June 2008 for the acquisition of the IPSCO Tubulars business from SSAB.”
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by John Helmer - Wednesday, May 6th, 2009
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By John Helmer in Moscow

Russia’s state-owned crude oil pipeline company Transneft will commence loading oil tankers at Kozmino, the newest Russian oil port to be launched, as soon as December. With eventual capacity to load and ship 50 million tonnes per year (1 million barrels per day), Kozmino is to be one of the largest oil outlets opening on to the Asian and Pacific market.

Starting this year, Igor Demin, spokesman for Transneft, told 21st Century Business Herald that Russian rail deliveries of up to 15 million tonnes of crude oil (300,000 bd) will be loaded at the new port. Five million tonnes of that (100,000 bd) are already committed by contract to be shipped to China, under loan and oil supply contracts recently signed in Beijing by Transneft and Rosneft with the China Development Bank and the China National Petroleum Company.

Another 15 million tonnes (300,000 bd) of Russian crude are committed, according to the same contracts, for delivery to northern China through the new overland pipeline being built from Skorovodino to the Chinese border. In four years’ time, as Transneft builds the rest of the planned pipeline from Skorovodino to Kozmino — called the East Siberian Pacific Ocean, or ESPO, pipeline — a total of 80 million tonnes (1.6 million bd) of new Russian crude will flow for export eastwards. Of that amount 30 million tonnes (600,000 bd) are already committed for delivery to China by the northern overland pipeline and from Kozmino port.

Demin also revealed that about 3 million tonnes of the new oil will go to domestic Russian refineries, including a new one to be built by state oil company Rosneft, located 4 kilometres from the terminus of the ESPO pipeline and the tanker terminal at Kozmino Bay. Demin’s disclosure of the 3-million tonne capacity at the new refinery is substantially below previous published estimates. This hints at competition between the two state companies, Transneft and Rosneft. It also suggests that Transneft sees more profit for itself in exporting crude through Kozmino, rather than delivering the crude for Rosneft to refine, and then export as petroleum products.

Until the ESPO pipeline opens in 2013, Demin said he expects 7 million tonnes pa (140,000 bd) of rail-delivered oil will be traded on spot or contract terms from Kozmino, starting at the end of this year. Demin said that South Korean buyers have already signaled interest in this crude, and that Chinese buyers will also be able to buy on spot-price terms.
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by John Helmer - Wednesday, May 6th, 2009
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By John Helmer in Moscow

In the world of mining, it can be much more profitable to leave the gold in the ground, and take out the cash from booming share or equity value. According to Oleg Mitvol, the mine regulator for the Russian Ministry of Natural Resources until last month, Russian goldminers are guilty of investing in only one kind of digging — on the stock exchanges, where share prices are driven by gold reserves in the ground.

The paradox of Russian gold equity value starts with this: in terms of gold reserves, Russia ranks second in the world, trailing only South Africa. However, in terms of gold production, Russia is currently lagging in sixth or seventh place – behind China, South Africa, Australia, the US, Peru, and sometimes Indonesia.

For stock market hustlers, this discrepancy is treated as a positive – a disproportionately low production level relative to the resource base, suggests significant upside or growth potential. If a global or emerging market investment strategy recommends the gold sector for all the reasons that make the precious metal attractive in current conditions, then this anomaly, the reserve potential factor, should recommend Russian goldmining stocks for buying.

That is, unless investors suspect that Russian reserve potential is a mirage, a pig in a poke, or worse, a fake — that there’s a relatively high Russian risk that the local miners will delay the capital expenditure required to bring their new projects into production, and fill out their reserve totals by moving paper, instead of shovels.

Just how far and how fast gold equity values can move can be seen in China, where two of the leading goldminers listed on the stock exchanges are Zijin Mining Group, with a current market capitalization equivalent to $3 billion; and Zhongjin Gold Corporation, worth roughly the same.

In market value, they are less than half the value of Polyus Gold, Russia’s leading goldminer, whose market capitalization is currently about $8 billion. But each of the Chinese miners is substantially larger than the value of the second largest Russian goldminer, Polymetal, currently at $2 billion; or the next two Russian goldminers, Peter Hambro Mining and Highland Gold, at $1.7 billion and $241 million, respectively. Even allowing for Peter Hambro’s recent capital gain from absorbing its Aricom non-gold affiliate, the two Chinese goldminers are one and a half times the value of the three Russians.
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by John Helmer - Tuesday, May 5th, 2009
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By John Helmer in Moscow

Steady as she goes — that isn’t exactly the message from Sovcomflot, Russia’s largest shipping company, and one of the five largest energy shipping, oil and gas tanker fleets in the world.

Analysts at Moody’s Investors Service have issued a rating downgrade for the state-owned shipping company Sovcomflot, with a report that focuses on growing doubt that the Russian government will or can support the refinancing requirements of Sovcomflot’s fleet.

According to the April 29 report from Moody’s analysts in Italy and France, Sovcomflot has been downgraded from Baa1 to Baa2. “The rating action,” says the report, “reflects Moody’s decision to lower the government support assumptions for the company in the framework of Moody’s rating methodology for Government Related Issuers. Although the rating agency continues to believe that SCF enjoys a high degree of support from the Russian government, the one-notch downgrade reflects the view that, in the current market conditions, such support provides a lower level of enhancement to the company’s own creditworthiness.”

Moody’s report cautions that the national credit ratings for Sovcomflot are not comparable to non-Russian companies, or to other international shipping companies. They differ “from global scale ratings, as assigned by Moody’s Investors Service, in that they are not globally comparable to the full universe of Moody’s rated entities, but only with other rated entities within the same country.”
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by John Helmer - Monday, May 4th, 2009
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By John Helmer in Moscow

The Russian government now leads the international naval powers’ tablewith 29 pirates under arrest, 14 more than the number being held by France, which has taken an estimated 71 Somalis in all; sent 11 to prison in Kenya; killed 4; and returned the rest to the Somali shore. The US has shot 3, and is currently holding one for trial in New York. On the Somali side, the pirates are estimated to be holding at least 16 vessels and about 270 seafarers.

Anatoly Serdyukov, the Russian Defence Minister, told a Moscowtelevision news programme on Wednesday afternmoon that “in the nearest time we will make a decision on what to do with pirates.” Russian naval interrogators are handling the pirates for the time being. Serdyukov added that the Russian Navy’s patrol of waters of the Gulf of Aden and Horn of Africa will continue.

The heavy destroyer, Admiral Panteleev, which is designed primarily for anti-submarine warfare, captured the Somali pirates,their vessel, and weapons on Tuesday evening, 15 miles off the Somali coast. How exactly this was done has not been disclosed. The Panteelev had deployed against the pirates after they attacked the Russian tanker, NS Commander, a 105,000-dwt vessel built for Novrossiysk Shipping Company in South Korea in 2006. The Commander was manned by a crew of 23 Russians.

The Russian Navy had despatched its anti-piracy patrol to the Horn of Africa last year, following the pirate capture of an Israeli-owned, Belize-registered vessel, the Faina, which was carrying Soviet-made tanks, air-defence weapons, and other arms intended for Kenya, and then possibly the southern Sudan. Most of the crew were Ukrainian; the master of the vessel and 2 crew memberswere Russian, and the master was reported to have died during the hostage-taking.

Russian tankercrews have also been taken for ransom off the west African coast.
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by John Helmer - Wednesday, April 29th, 2009
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By John Helmer in Moscow

In the global marketplace for potash — one of the vital nutrients for plant growth, food production, and fertilizer fortune — noone is sharper at spotting a bargain than China. That’s because Chinese farmers, and the state fertilizer distributors, comprise the world’s largest consumers and importers of potash. And more than that, when the Chinese fix their annual contract price for potash imports, they set the marker for counterparts in India, southeast Asia, and Brazil, the next biggest potash markets, to follow.

During the last few years, China’s demand has been supplied by several sources , including Canpotex of North America, representing Canadian and US mining companies such as Potash Corporation; the Belarusian Potash Corporation (BPC), representing potash mined in Belarus and Russia; and Israel Chemicals Ltd. (ICL). During the past four years of farm potash supply hunger, and commodity price boom, the China market grew steadily, and so did potash prices.

But that’s history now. In the last half of 2008, the crash of all commodity prices and the shortage of farm credit have led most producers of potash to curtail their production dramatically, and prevent the accumulation of unsold stocks. In the first quarter of 2009, the Russian producer Uralkali, for example, cut its production of potash from 1.3 million tonnes to 459,000 tonnes, a reduction of 63%. Potash Corporation, the world’s largest potash producer in Saskatchewan, has reported that in the same period it cut sales volumes to North American customers by 86%, and to the rest of the world by 78%.

But it’s spring in China; and after an unusually rainless winter, farmers preparing to plant must have more potash than usual to improve their yields out of the dry ground. This is also the time that China’s big-volume buyers usually meet with the major producers and suppliers to fix the volume of deliveries of imported potash for another six to twelve months. But if the China National Agricultural Means of Production Corporation (CNAMPGC), the China National Chemical Construction Company (CNCCC), and Sinopec — the three major Chinese import buyers – keep their pens in their pockets, and their contract orders off the table, what exactly is happening?
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by John Helmer - Wednesday, April 29th, 2009
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By John Helmer in Moscow

Russia’s maiden LNG terminal became operational in late 2008, after years of controversy over seismic and ground contamination onshore; threats to whale habitats at sea and tax evasion claims in Moscow. Gazprom, Russia’s dominant gas producer and monopoly exporter, now has shareholding control of the project operator, Sakhalin Energy, replacing Royal Dutch Shell. On March 29, the first LNG cargo was loaded aboard a tanker at Prigorodnoye port, on Aniva Bay, with 145,000 cubic metres of LNG bound for the Sodegaura terminal in Tokyo Bay, and for end-users, Tokyo Gas and Tokyo Electric. When the two planned production trains of the project reach full capacity in a year’s time, the Sakhalin LNG terminal will ship 9.6 million tonnes of LNG each year. Japan will take roughly two-thirds of the LNG from Sakhalin; South Korea will take most of the remainder.

As the world’s largest exporter of natural gas by pipeline, Gazprom has made no secret of its ambition to increase its share of the global LNG market, and improve the netback margins it may earn from exported gas sales. A recent Gazprom management review pointed out that LNG earns spot-price premiums compared to fixed-price long-term natural gas supply contracts that form the bulk of Gazprom’s sales revenues. But LNG projects are capital- and engineering-intensive, and take from 5 to 10 years to start. For these reasons, Gazprom concedes that it has run into capital-raising problems for the Shtokman field, in the Barents Sea; and these in turn are delaying a clutch of schemes for gasification and shipment of LNG from northwestern Russia.

Total of France, one of the Shtokman field developers with Gazprom, had been saying that it envisaged four LNG plants to be built as Shtokman’s output capacity ramps up; the first of these was intended for a start date of 2014.

According to Gazprom’s plan for entering the US and Canadian LNG markets, first announced in 2005, this first northwestern gasification plant and loading terminal was intended for Primorsk, near St. Petersburg, on the Gulf of Finland; its capacity was for 7.2 million tonnes per annum. A Gazprom analysis in 2005 claimed that “the most promising market in terms of LNG supplies is the USA where… LNG imports will grow tenfold (from 18 to 180 bcm/y) .” ConocoPhillips and Chevron agreed to study marketing plans for shipments to the US with Gazprom. The Russian company also negotiated potential supply deals with the Canadian LNG terminals being built in Quebec.
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by John Helmer - Tuesday, April 28th, 2009
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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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