The Russian consensus has been growing that the Chelyabinsk court case to halt MMK’s takeover of Flinders Mines followed high-level intervention, and the acquiescence at the very least of Victor Rashnikov, MMK’s proprietor. The one twist so far to emerge in Russian coverage of this unusual affair came from Vladimir Zhukov, the metals analyst for HSBC in Moscow. In a report dated February 21, Zhukov wrote that it was curious that MMK was selling off domestic iron-ore deposits. “The level of upstream integration into iron ore is set to decline further in the near term, as according to the press (Kommersant Daily from February 2, 2012), MMK is looking to divest of its 51% interest Bakal iron ore operations (1mtpa) citing a shareholders conflict. While we do see a long-term trade-off in the replacement of lower-quality and higher-cost purchased iron ore with the iron ore to be produced at MMK’s project in Australia (Flinders Mine), the [latter] mine is not scheduled to start production until 2015. In this light, the recent rumour (see Bloomberg from 2 February 2012) that Metalloinvest (Russia’s largest producer of iron ore) is interested in a merger with MMK could make sense.” Metalloinvest is controlled by Alisher Usmanov, who has many times gone public with his ambition to consolidate the iron-ore mines of Russia, Kazakhstan, and Ukraine, integrating them with steelmills that he doesn’t own. In 2005 he attacked Rashnikov, and cut off iron-ore deliveries to MMK for several months to encourage a form of combination between the two. Rashnikov got Kremlin help to drive Usmanov off, and avoided relying on him for iron-ore supplies until last October. That was when MMK cut its iron-ore supply contract from Kazakhstan’s ENRC, and increased supplies from Metalloinvest. Bloomberg has been promoting Usmanov’s frustrated desire to sell Metalloinvest shares in a respectable stock market. On April 11, the news agency featured the heroics of Farhad Moshiri, “the Iranian…billionaire helping Russia’s richest man [Usmanov].” In the earlier Bloomberg report of February 2 report, Eduard Potapov, Metalloinvest’s chief executive, claimed to see “significant synergy” between his unlisted company and the listed MMK. If he was prompting Bloomberg to ask him a question, so that he might drop the hint that his boss Usmanov wanted a reverse listing by backing into MMK, noone in the market noticed – except for Zhukov of HSBC. According to Zhukov, “we have clarified with Bloomberg that this answer was given to a question regarding whether Metalloinvest would be interested in acquiring MMK; it was therefore a solicited response and so should not be interpreted as Metalloinvest declaring an intention to merge with MMK. However, given that the potential tie up of the two companies makes strategic sense indeed as MMK is short of its iron ore.” In the past, Usmanov has run into many problems getting a London Stock Exchange listing, and if he is looking for a backdoor, this would not be the first time. Here is the story of several of his earlier attempts. Zhukov reports to HSBC clients that Usmanov probably could afford to buy Rashnikov out, and that such a deal would mean that, instead of exporting iron-ore to China and other places, Metalloinvest would supply all of MMK’s requirements. That would not only put an end to the remaining supply deal with ENRC, it would save MMK the $2 billion cost of building the Priolskoye iron-ore mine in western Russia. Again, according to Zhukov’s assessment, “while the current contract with Metalloinvest covers only approximately 25% of MMK’s current needs in iron ore (2.4-2.8mtpa out of MMK’s annual purchases from third parties of 12mtpa), Metalloinvest could potentially cover 100%. As 75% of MMK’s current purchases of iron ore from third parties come from ENRC, in the case of the potential tie up, we see a long-term risk for ENRC of losing the contract with MMK. We believe that the way for Metalloinvest to realise the most synergies from the potential acquisition ofMMK is via the full replacement of ENRC.” No other investment bank in Moscow has followed up on the Usmanov hint, if that’s what it was. Noone has interpreted Elena Egorova’s lawsuit against the Flinders Mines deal as a collaborative scheme by Rashnikov and Usmanov; and noone has asked Rashnikov to say if he is planning to hang up his football boots, and hand the field over to Usmanov.
FMS Price at posting:
20.0¢ Sentiment: Buy Disclosure: Held
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