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By John Helmer in Moscow

Russia’s biggest iron-ore miner defers public share sale due to global cash crisis

Metalloinvest, the Russian steel and iron-ore holding controlled by Alisher Usmanov, has failed to fix an international market value for listing and sale of its shares. This is the market interpretation after an announcement on Thursday by chief executive, Maxim Basov, that the group (also referred to as Gazmetall) will not proceed with a planned Initial Placement Offering (IPO) this year.

Basov was quoted in a Russian press agency bulletin as saying “our shareholders and management examined the possibility of conducting an IPO this autumn as an option for growth. But we decided against this. There’s a serious crisis in the world and an IPO simply doesn’t make sense.”

Usmanov holds 50% of the private shareholding; Andrei Skoch, 30%; and Vasily Anisimov, 20%. The main assets in the holding are the Ural Steel (Nosta) and Oskol steelmills, and the two iron-ore mines, Lebedeinsky and Mikhailovsky.

In February, negotiations for a merger between Usmanov and the Ukrainian Industrial Union of Donbass (IUD) foundered over valuation and control issues. At the time, Usmanov had valued his assets at $20 billion, while he insisted that a swap of shares should leave IUD with less than a 50% stake in the new, merged company.

IUD sources had told Mineweb at the start of the talks in 2007, which Usmanov had leaked to the Moscow press, that they were not keen on the proposed merger, and that their interest to negotiate was limited to commercial agreements for iron-ore supply. Alexander Pilipenko, the vice-president of IUD, responded at the time that “the issue [of merger] is not yet decided. Currently we have no committed agreements in either merger or raw supplies and it is too early to say that they will appear very soon.”

IUD’s owners, Sergei Taruta and Vitaly Gayduk, then refused to accept Usmanov’s offer of between 27% and 40% in the new company.

Usmanov then struck an agreement with controlling shareholder of Norilsk Nickel, Vladimir Potanin, to merge with the latter, Russia’s largest mining company. At the time this deal was announced in February, it was understood by both men as a move to block a hostile takeover of Norilsk Nickel by Oleg Deripaska’s aluminium group, United Company Rusal. Once again, there were disagreements over price and valuation.

Dmitry Smolin, equity analyst at UralSib Bank in Moscow, told Mineweb that, based on 9-month financial data for 2007, Usmanov’s two iron-ore mines and two steel mills should have an enterprise value of $20 billion, only if an EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) multiple of seven were applied. That, Smolin argued, was too high, taking into account international iron-ore miners like Vale of Brazil. “We prefer to use a target EBITDA multiple of six to seven times for [the iron-ore] GOKs and five to six times for steels (sum of the parts valuations).” A February 2008 estimate for Usmanov’s assets in consolidation by Norilsk Nickel would be between $15.6 and $18.4 billion, according to Smolin.

Usmanov did not agree, and for several months he and Potanin argued. According to Vladimir Zhukov of Lehman Brothers, one scenario for their deal was “a structure whereby Norilsk Nickel would buy Metalloinvest for a combination of cash and equity, say 50/50, and assume a valuation of the latter of $20bn. As a result, the shareholders of Metalloinvest end up with $10bn in cash and can theoretically enter into a back-to-back transaction with Prokhorov to buy out some of his shares.” It was reported in Moscow that Usmanov was telling Potanin that he could achieve a valuation of between $28 and $30 billion for Metalloinvest, if his underwriters proceeded with an IPO.

The pressure on Potanin for takeover from Deripaska, and pricing from Usmanov, led Potanin to announce on May 28 a newly structured deal with Usmanov’s Cyprus holding, Gallagher. According to the Interros press release, “considering the high potential for the growth of Norilsk Nickel value, Gallagher company expressed its intention to acquire up to 10% in this company. In its turn Interros considers the possibility to buy 25% plus one share in Metalloinvest holding and intends to file an appropriate request to Russian antitrust authorities.”

That language fell far short of the merger previously announced. It was vague on whether Usmanov might already have bought Norilsk Nickel shares from the market.

In the weeks that have followed Interros sources say they are not sure what stake, if any, Usmanov has acquired. However, it appears that Potanin has not bought into Metalloinvest.

Apart from the disagreement over price, Potanin secured sufficient backing from the Kremlin to block Deripaska’s takeover. Once he had that, he no longer needed to come to terms with Usmanov, at Usmanov’s price. Potanin met President Vladimir Putin on April 24, and his deputy in charge of resource policy, Deputy Prime Minister Igor Sechin, on July 28. They confirmed their opposition to a further expansion of Rusal’s stake in Norilsk Nickel beyond the 25% acquired by Deripaska in the spring.

As Usmanov’s tactical value to Potanin dwindled, the strategic value of Metalloinvest shrank. In July, Usmanov tried an alternative to a direct listing of Metalloinvest. He was reported as making a reverse takeover bid for the Kazakhstan copper miner, Kazakhmys, which is already listed on the London Stock Exchange (LSE). On July 14, Kazakhmys announced that it was in negotiations with an unnamed party identified in the market as Metalloinvest. Then a day later, Kazakhmys followed with a second announcement that it was “not currently contemplating the implementation of such a combination through a structure that would be classified as a reverse takeover under the rules of the UK listing authority”.

It was reported by the Guardian that the apparent change of mind came after the Financial Services Authority (FSA) warned Kazakhmys that the proposed takeover would oblige the LSE to suspend trading in Kazakhmys’s shares, while an investigation was undertaken into the corporate governance of the bidder, Metalloinvest.

That may have been the last straw for the Metalloinvest listing plan, for Russian share prices collapsed across the board in August and September. Norilsk Nickel has lost 43% of its market capitalization in the three months since July 1. The two Russian steelmakers with large iron-ore mines, Evraz and Severstal, have lost 68% and 57%, respectively.

An announcement in September that Metalloinvest had won the bidding to develop the Udokan copper deposit in southeastern Siberia created a new funding problem for Usmanov. The terms of the state award require an initial payment for the mine licence of Rb4.5 billion ($176 million), and a total of Rb15 billion ($588 million). A release by Metallonvest reported that total investment in the project will require more than Rb100 billion ($3.9 billion).

Neither Metalloinvest, nor its state partner in the Udokan project, Russian Technologies, controlled by Sergei Chemezov, has that much cash. Accordingly, according to Interros, they have turned to Potanin for a partnership with Norilsk Nickel to develop the mine. These negotiations are now under way in Moscow.

Basov of Metalloinvest put the blame for the IPO failure on “the serious crisis” in global markets. But he added that, if market conditions were to improve, his company was prepared to sell shares to the public “at short notice”.

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