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By John Helmer, Moscow

After almost a year of inconclusive negotiations with a secretive South African group called Nemascore, Evraz, the Russian steelmaker and miner, has announced to the Johannesburg Stock Exchange that negotiations have opened to sell its control stake in Highveld Steel & Vanadium to new buyers. The notice to the exchange last week said Evraz informed the Highveld board that “it is, in addition to Nemascore (Proprietary) Limited, currently engaging with other potential bidders with a view to disposing of its 85.11% stake in the Company. The independent board of the Company has agreed to allow these potential bidders to conduct a due diligence investigation into the affairs of the Company.” The Evraz notice added that the talks are “incomplete, confidential and non-binding, hence there is no certainty that a transaction will take place.”

Before the notice, the market value of Evraz Highveld was a total of $144 million, so the Evraz shareholding for sale was worth $123 million. The effect of the disclosure was to trigger a 6% rise in the share price. But this lifted the Evraz stake to no more than $130 million. Last March Nemascore offered to pay $320 million for this bloc of shares. Established in February 2013 by lawyers associated with South Africa’s President Jacob Zuma (image right), Nemascore has refused to provide information about itself, or its plans for the Highveld company. For the full story, read on.

South Africa’s Ministry of Industry and the state-owned Industrial Development Corporation have said they will not provide financing or repayment guarantees for the transaction, despite indications that Evraz had lined up the Russian state bank VTB for a loan to Nemascore. Last August, Pavel Tatyanin, the head of international business for Evraz, told investment analysts the reason for the delay in finalizing the sale was that Nemascore “was taking a little longer time to put together a financing package.”

On December 19 Evraz announced that the “Transaction is expected to be concluded towards the end of Q1 2014”. The latest disclosure to the Johannesburg exchange means that Evraz’s control shareholders, Roman Abramovich (image left) and Alexander Abramov, are trying to find a replacement buyer for Nemascore.

The Highveld plant is one of several assets the heavily indebted Evraz group has been trying to liquidate into cash. In its last report, Evraz Highveld said production results were an improvement over its performance earlier in the year. It managed to lift production of liquid iron to 161,203 tonnes in the December quarter, a gain of 11% over the September quarter volume. However, production of steel sections was cut by 19% to 44,745 tonnes; plate output fell 2% to 41,065 tonnes. Coils were up 13% over the same interval to 30,680 tonnes; vanadium slag grew 13% to 1,662.8 tonnes, while vanadium fines in ore shrank by 6% to 144,876 tonnes. Ferrovanadium output reached 1,317 tonnes, up 6% on the quarter. Sales prices were in retreat, the company added. In its last financial report (for the first six months of 2013) Highveld was lossmaking.

A Johannesburg source revealed this week that he “had been approached by a group of business people interested in doing the EVRAZ deal but [they] are not certain about the progress and potential pitfalls.” The disclosure suggests that Evraz is attempting to stimulate the sale price by publicizing a bidding contest, but the bidders are demanding a discount in the asking price. Asked if the Nemascore offer of $320 million is still on the table, the source implied it is not, and that the bidding is now focused on “fair value”.

The rally in the Highveld shares went into reverse on Wednesday, and the share price is now lower than it has been since last August. The Johannesburg market appears to be betting that fresh price bids will be a fraction of the Nemascore offer – possibly as low as the price Highveld was fetching on March 26, 2013, just before Nemascore appeared with its offer. That day the Evraz shareholding was worth just under $120 million.

As of June 30 last, Evraz reported total indebtedness of $8.2 billion, and still growing. Last month a presentation of the group’s prospects failed to mention the latest debt figure. Evraz has acknowledged that it is trying to dispose of lossmaking steelmills, coal and iron-ore mines in Russia, Europe, the US, and South Africa; at the same time it says it is opening a new mill in Kazakhstan, and slowing down plant investment in the Ukraine.

If Evraz manages to find a buyer for Highveld, and the price is well below the Nemascore offer, the difference will support market speculation that there has been a connection between the Nemascore offer and another Russian transaction which failed in South Africa this month – Rosatom’s $50 billion sale of nuclear reactors. The Rosatom deal disappeared on February 15 when the South African Government failed to meet the deadline it had appointed for finalizing the reactor agreement. Six days later Evraz revealed that Nemascore may be replaced in the Highveld deal.

If that’s an unfortunate coincidence, it’s also as much as $200 million in lost opportunity for Abramovich and his Highveld sale arrangers.

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