By John Helmer in Moscow

The Russian and Azeri governments have taken the air out of a scheme to provide Europe with an alternative source of gas supply to Gazprom, which signed an agreement on Monday with the State Oil Company of the Azerbaijan Republic (SOCAR). When it comes to putting the gas into high-priority political schemes for Europe’s energy needs, the Kremlin proves once again that it is prepared to put money where its mouth is, while the European Union raises hot air in think-tanks and editorial columns.

The new deal, signed in Baku during a visit by President Dmitry Medvedev, provides for Gazprom to begin purchasing gas from Azerbaijan from the start of next year. The initial volumes are very small — just 500 million cubic metres per annum. But they give Gazprom the option to increase them, as Azeri production from the Shah Deniz field, in the Caspian, ramps up. “All things being equal among potential buyers, priority will be given to Gazprom,” Gazprom CEO Alexei Miller said at the signing ceremony. “Other buyers would have to offer conditions that are more financially attractive.”

According to unidentified sources cited in the press, Gazprom is going to pay some $350 per thousand cubic metres, a substantial premium to the current market price, and roughly in line with the $340 price paid by Gazprom to Turkmenistan in the first quarter of this year. From the point of western brokerages and western shareholders, this is costly for the company’s bottom-line, and thus for its dividends and share price. So long as gas prices remain low on low demand, there is the potential, argues a report from Unicredit Securities, “to force Gazprom to cut its own production while replacing it with virtually zero-margin Central Asian gas.”
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by John Helmer - Tuesday, June 30th, 2009
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By John Helmer in Moscow

In Russia today, there is a word that dares not speak its name — and it isn’t the one that got Oscar Wilde into his famous trouble at the Old Bailey in the spring of 1895. That word is банкротство — “bankruptcy”.

In the short history of Russian politics, it is to be expected that now — just as in 1998 and 2003 — the dominating fear of Prime Minister Vladimir Putin is of a domino-effect collapse of the banking system. Given the growth and potential size of the non-performing loans Russia’s banking system is currently carrying, it is realistic to fear this could happen some time in the second half of this year. For the time being, then, it is realistic for the Russian government to aim at short-term measures to avert a series of corporate bankruptcies that might then trigger bank failures, with tsunami impact on the cities and regions that depend on them. This has the policy corollary of persuading all high-policy decision-makers to camouflage or protect the insolvent trading positions of oligarchs like Oleg Deripaska. He has managed to get President Dmitry Medvedev to beg Alfa Bank to call off its loan repayment call (in vain); and then Putin to announce, months before it falls due, a rollover of his largest debt, while obliging a state bank and a regional budget to cover the wage bill his Pikalevo cement plant had run up.

For the time being, therefore, the men who produce aluminium, nickel, and copper are being protected at the highest level from the B word. The steelmakers are another kettle of fish — and most of those are getting the same protection. But not all — and not Nikolai Maximov.
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by John Helmer - Monday, June 29th, 2009
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By John Helmer in Moscow

The Udokan copper deposit, in southeastern Siberia, will not be mined any time soon, according to government and commercial mining sources in Moscow. For miners, who have been watching this particular copper pot pass from one hand to another, including BHP’s very briefly in 1992, this should come as no surprise. According to one of the current stakeholders with the mining licence, Alisher Usmanov’s Metalloinvest, there is simply too much copper in the market to warrant the capital cost of digging more out of Udokan.

Officially, all the closely held Metalloinvest group will say, in a press release dated June 25, is that after a nine-month delay, it has finally signed the Udokan licence agreement with the federal mine licensing agency, Rosnedra, a branch of the Ministry of Natural Resources. The terms have been changed, the release acknowledged: “In the course of negotiations between Metalloinvest and Rosnedra the parties reached an agreement about changes in the terms of the license agreement taking into consideration the interests of the government and the investor.”

A ministry source told Minesite, off the record, that the licence terms have not been changed since Metalloinvest won a state tender for the project last September, and accepted the licence price and terms at that time. A source at Metalloinvest said “the terms are the same as the initial ones.” But he acknowledged that the “time frame” is being renegotiated. In short, the investment spending and production targets set out in the licence agreement remain, but the time allowed to the mining group to reach them is being stretched out. “The timing was set while the copper price and demand for copper were completely different,” Metalloinvest now says, admitting the delay in making payment for the licence, and signing this week’s agreement. “We are delaying, not because of lack of financing, but because we don’t understand whether market needs that much copper soon.”
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by John Helmer - Friday, June 26th, 2009
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By John Helmer in Moscow

The grain trade war between Moscow and Cairo took a fresh twist this week, following the announcement during President Dmitry Medvedev’s visit to Egypt on Tuesday that the two governments have agreed on terms for direct, large-volume shipments.

A Russian government briefer has claimed that Medvedev agreed with his counterpart, Egyptian President Hosni Mubarak, to the Egyptian proviso that Russian grain sales to Egypt would grow above the current annual 3-million tonne level, if quality issues are resolved.

In May, government officials at the Egyptian ports, Safaga and Damietta, seized and quarantined an estimated 137,000 tonners of grain which had been put on board ship at Novorossiysk. The seizures were reported in the Egyptian and Russian media to have been ordered by the Egyptian prosecutor, allegedly on claims of high weevil infestation. Subsequently, there are unconfirmed reports of the release of 56,000 tonnes, leaving an estimated 81,000 tonnes of Russian grain in Egyptian limbo. Medvedev’s one-day appearance in Cairo, and reference to the grain trade problem, appears not to have produced the release of this cargo, according to a source at the Russian Grain Union.

What then was Medvedev intending to do about the problem in Russia’s most important market for export wheat?
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by John Helmer - Thursday, June 25th, 2009
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By John Helmer in Moscow

The Mechel steel and mining group — Russia’s largest producer of stainless steel and coking coal — is the only Russian metals and mining company to submit to the regulatory requirements of the US Securities and Exchange Commission (SEC). That began in 2004, when Mechel, then owned by Igor Zyuzin and Vladimir Iorikh, were the co-owners. Since then, Iorikh sold out, and moved his investment operations to Switzerland. He opted to jump. The New York Times and its reporter who published a different story were recently obliged to admit their mistake, and apologize to Iorikh.

Zyuzin has remained behind to borrow heavily and pay premium prices for ferroalloy and coal assets he is now having trouble affording. In retrospect, Iorikh’s calculation and timing gather wisdom.
In the meantime also, all the other Russian metals and mining proprietors, who wished to sell unsecured securities in their concerns to foreign investors, get an international market valuation, and borrow against it, have opted not to submit to the requirements of a US listing. Their debts, pledges, and loan covenants are probably just burdensome as Zyuzin’s. But they have been obliged to disclose much less to the market than the SEC has required of Mechel.
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by John Helmer - Thursday, June 25th, 2009
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By John Helmer in Moscow

The buyout offer for minority shareholdings in Toronto-listed High River Gold (HRG:TSX) now looks double-doomed. A combination of minority shareholders has now formed that is numerically strong enough to prevent the Russian Severstal group, owned by Alexei Mordashov, from suceeding in his 22-cent offer for the 42.7% of shares he doesn’t already control. And Mordashov himself, and his Severstal group, appear to be under strict bank loan covenants to preclude any new deal worth $150 million, and thus in no position to raise their bid high enough, or borrow more money, to make the buyout possible.

HRG will hold its annual general shareholder meeting on June 30 in Toronto. Although the buyout bidding has been the dominating topic of shareholder talk for weeks — Mordashov raised his offer from 18 Canadian cents to 22 cents on June 9 — no action on that issue is expected. In the meantime, there have been threats of litigation against Severstal and the HRG management, while the Ontario Securities Commission is considering a shareholder complaint filed on April 24.

An HRG board deadline for a delisting review has been fixed for August 17. If Mordashov’s buyout offer of 22 cents fails by then, there will no delisting top speak of.
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by John Helmer - Wednesday, June 24th, 2009
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By John Helmer in Moscow

Responding to a request from PolishedPrices.com for clarification of the June 20 election of a new Alrosa board of directors, without chief executive Sergei Vybornov, Alrosa spokesman, Yelena Nikiforova, has provided the following company statement. “The largest shareholder of the company in the name of the government of the Russian Federation does not consider necessary the presence of representatives of executive management as a part of the Supervisory Board of Alrosa… According to the government decision, the structure of boards of directors of state companies should include professional counselors, Alrosa says, and so representatives of the Russian Federation voted for inclusion in the structure of the Supervisory Board of the company of independent directors. The President of Alrosa [the chief executive] in any case participates in the Council work as the head of an executive office of the company. As to the election in the structure of the Supervisory Board of Alrosa vice-president Ivan Demyanov, this [was the] decision of the second-largest shareholder, the Government of the Republic of Sakha.”

Nikiforova also said that Vybornov is a member of the presidential delegation, led by President Dmitry Medvedev, which leaves Moscow today for a tour of Africa, with stops in Egypt, Nigeria, Namibia, and Angola.

by John Helmer - Tuesday, June 23rd, 2009
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By John Helmer in Moscow

Igor Zyuzin, the controlling shareholder of the Mechel steel and coal-mining group has disclosed to the US Securities and Exchange Commission (SEC) that he has pledged as security about 158 million of his shares in the group, in order to secure bank loans now under negotiation. Mechel is the Russian leader ion stainless steel production, and one of the world’s largest coking-coal miners.

The purpose of the pledges is reported to the SEC as “in connection with certain financings.”

Since Mechel has on issue about 416 million shares, Zyuzin’s pledge represents just under 38% of the total issue. It is not quite clear what proportion this represents of his own control stake in Mechel. According to the SEC filing, as well as Moscow brokerage reports, Zyuzin was obliged to give up a 3.1% stake in the company when convertible bondholders were repaid 12.9 million shares worth $150 million in a transaction of three months ago. Following that transfer, Zyuzin reportedly held 66.8% of the Mechel share issue, or 278 million shares. The latest SEC disclosure means that Zyuzin has lost direct control of 57% of his shareholding.

This is an outcome that industry and company sources have consistently suggested that Zyuzin himself had been trying to avoid in his negotiations with the Russian state-controlled banks, as well as with the commercial lending sydicates, with which Mechel has been discussing terms for the refinancing and repayment of more than $3.5 billion in overdue loans.
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by John Helmer - Tuesday, June 23rd, 2009
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By John Helmer in Moscow

Sergei Vybornov, chief executive of Alrosa, has been omitted from the new board of directors, known as the Supervisory Board, according to a company announcement posted after the annual general shareholders meeting on June 20: http://www.alrosa.ru/press/releases/detail.php?ID=4338

Other changes in board membership have also been disclosed in the new board listing; these suggest the impact of the financial crisis on Alrosa’s operations, and of problems reportedly uncovered by the Accounting Chamber, the independent Russian state auditor. A member of the Chamber audit team said the check of Alrosa took place at the beginning of this year, and the results were reviewed by the Chamber Collegium in April. She said the results were reported to the government iun a report stamped confidential.

The new 15-member board has 5 representatives of the Sakha republic, including the Sakha President Vyacheslav Shtirov; the 2007-2008 board had 6 Sakha representatives, so the Sakha representation has been reduced in line with the 32% shareholding in Alrosa held by the regional government.

The Alrosa management had two seats on the old board — the Chief Executive Officer Sergei Vybornov and the Vice President, Ivan Demyanov. Vybornov has been omitted from the new listing, and Demyanov remains. No CEO of Alrosa has been excluded from the board before. Last week, Vybornov told an industry outlet: “Alrosa has only one shareholder — the state — who could fire me, and it has said it does not plan to do so.” Vybornov’s spokesman was contacted for comment, but his telephone was not answering.
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by John Helmer - Monday, June 22nd, 2009
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By John Helmer in Moscow

A briefing by Russian coking coal producer Raspadskaya this week suggests pessimism that sales to the domestic steelmills will recover beyond their current monthly level. For brokers and speculators, the fortunes of the publicly listed mining company (ticker RASP:RU) now depend on betting that China will continuing substituting costly home-grown coal supplies with cheaper Russian imports, and that Russian miners like Raspadskaya can continue beating the Australians and South Africans on price.

Deputy General Director Alexander Andreyev said on June 17 that Raspadskaya is currently operating at a 75% capacity utilization rate, compared to pre-crisis September 2008. At that time, the company produced 734,000 tonnes of coking coal concentrate, so the implied June 2009 output should be about 550,000t. The last officially reported production figure from Raspadskaya was for March at 529,000t.

Andreyev also said that the current price for his concentrate is $53 per tonne.

According to a report on Raspadskaya today by Michael Kavanagh, steel analyst at Uralsib Bank, coking coal output in April and May was also at the 550,000t level, so “production appears to have reached a plateau.” He also notes that earlier targets announced by the company have not been met. “Raspadskaya’s management had previously stated that 2Q09 production was expected to be 2.5 mln tons of coal (1.87 mln tons of concentrate), and that production capacity utilization should reach 80%. It now looks as though 2Q09 production will be just 2.2 mln tons of coal (1.65 mln tons of concentrate), which is 12% below the previous target. ”
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by John Helmer - Thursday, June 18th, 2009
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