usmonov and tata are going to need iron ore mi

By Catherine Belton in Moscow and Roman Olearchyk in Kiev

Updated: 5:40 p.m. ET Feb. 19, 2007
A leading Russian ore producer and a Ukrainian industrial holding company have signed a preliminary merger agreement, in a deal that could establish the largest steel maker in the former Soviet Union.

The deal would merge Gazmetall, controlled by Russian billionaire Alisher Usmanov and which produces about 6m tonnes of steel annually, with Kiev's Industrial Union of Donbass, known as ISD Group, which produces some 9m tonnes of steel a year.

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Mr Usmanov told the Financial Times that both groups had on Monday signed an agreement to start valuations of the two group's assets, a process he said would take about three months.

He said he wanted to offer shares in the new company to investors through an initial public offering on the London Stock Exchange within a year.

Analysts said the combined company could be worth anywhere between $10bn and $20bn. Neither company has transparent financial accounts.

The proposed merger follows a drive for consolidation within the steel industry. Russia and Ukraine rank among the world's largest steel producing countries and are home to vast coal and ore reserves.

"We have long been looking to consolidate assets within [the region]. This will reduce the cost of production," Mr Usmanov said.

He said a merged company would produce about 20m tonnes of steel annually within two years, overtaking the regional number one spot from Severstal, which produced 17.6m tonnes of crude steel worldwide last year, of which 12m was produced in the CIS.

Industrial Union of Donbass does not have its own sources of ore. Ukraine's ore deposits are controlled by competing Ukrainian and Russian steel groups. Gazmetall controls 40 per cent of Russia's iron ore output.

Gazmetall also owns two leading Russian ore producers ¨C Lebedinsky and Mikhalovsky Ore. Industrial Union of Donbass owns two mills in Ukraine and has a steel production foothold in Europe, having in recent years acquired Hungary's Dunaferr and Poland's Huta Czestochowa mills.

Vitaliy Gayduk, Ukraine's national security and defence council chief, is one of the principal shareholders of Industrial Union of Donbass. Sergey Taruta, ISD chairman, is the other main shareholder.

ISD could not be reached for comment.

Mr Usmanov said Mr Taruta would probably be appointed president of the merged company, while Gazmetall would appoint the company's chairman.

Gazmetall remained open to merger proposals from Severstal and Evraz, the London-listed Russian steel group, he added.

"Whoever bests suits us will be our first partner," said Mr Usmanov, who also heads Gazprominvestholding, the investment arm of Russian gas giant Gazprom.