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By John Helmer in Moscow

The Russian government’s quid pro quo for state financing for the Mechel group’s coalmining operations appears now to include the takeover of a fourth steel plant from the bankrupt Estar group, owned by Vadim Varshavsky. According to Dmitry Teplov, the head of the industry department in the Perm region, Mechel sent representatives to the Nytva Metallurgical Plant two weeks ago; and Igor Zyuzin, the controlling shareholder and chief executive of the Mechel group, is now considering whether he will take over operational management of the plant.

His spokesman Ilya Zhitomirsky won’t say that Zyuzin is happy to do so. The spokesman won’t say anything at all about the terms of Zyuzin’s new concession with the Russian government. The silence is a signal that Zyuzin is afraid that Mechel may be dragged into repaying some of the debts Varshavsky ran up by pledging steelmill assets as security for cash Varshavsky took elsewhere. Alfa Bank steel analyst Barry Ehrlich reports “it is hard to assess the impact of taking the small assets of Estar Group under management. We believe that this could help Mechel to expand in other production segments and diversify the geography of its sales. On the other hand, this may lead to additional costs with no substantial returns.” It’s the last part that’s the rub: Zyuzin appears to be anxious not to welch on his Kremlin deal, nor reveal to his foreign shareholders what the real cost may be.

First built in 1939, Nytva produces stainless steel cutlery and kitchenware. The most recent disclosure from Estar indicates that in 2007 the plant’s sales revenues amounted to Rb2.5 billion (then about $100 million), indicating 29% growth on the 2006 level. This represented output volume reported of 16.1 million units of kitchenware. In addition, Estar reported production of 50,900 tonnes of rolled steel and a quantity of billet for coin minting. In the first quarter of this year, there are reports that Nytva’s revenue was Rb299 million ($10 million), and its operating loss, Rb16.9 million ($563,000). Now in bankruptcy, Estar’s website is no longer operational, and spokesmen for the group no longer answer telephones.

Teplov did not respond to questions, following a report on Wednesday of his negotiations over Nytva’s future in the Moscow newspaper, Kommersant. The newspaper also reports that Estar had earlier tried to transfer the Nytva plant to Magnitogorsk Metallurgical Combine, and to Metalloinvest, without success. The Nytva district administrator, Vitaly Trefilov, is reported to have said that the terms of the deal with Mechel include the delivery of stainless steel and alloys for the production line.

Industry sources claim Mechel is refusing to take equity or financial responsibility for the ex-Estar units, but is prepared to provide working capital in the form of raw materials and semi-finished steel. Regional government officials have already been reported as negotiating Mechel takeover arrangements for three other Estar plants — Zlatoust, Rostov, and Guryev.

Pyotr Ogorodov, deputy head of the Nytva municipal district, Trefilov’s deputy, told CRU Steel News that Mechel has not bought shares of the Nytva works, nor taken control of the plant. “The debt of the Nytva factory itself is Rb. 599 million [$20 million]. But the total debt, including a loan secured [by Estar] against the factory’s property is Rb2,972 million [$99 million]. The factory will not be able to settle the debt.

Currently, a formal bankruptcy procedure has been introduced at the factory. But if Zyuzin acts on behalf of Vladimir Putin, then we hope the government will take care of the factory’s indebtedness, and Mechel will not have to use its own money. Mechel, after all, is not a bankrupt company, and Zyuzin will be a better manager.”

According to Ogorodov, production by the steel plant this year is down 35.4% on last year’s volume. “Today there are 2,250 employees at the factory. Last year there were about 2,500 employees working.”

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