Evraz moves assets offshore
Russia's largest steel maker and mining company, Evraz Group, announced on March 31, 2005, that it had transferred the entire shares of its
iron ore mines Kachkanarsky, Evrazruda and Vysokogosrky to the company's EU member
Cyprus-based affiliate Mastercroft Limited.
A press release from Evraz indicates that the transfer of shares to Mastercroft completes Evraz's consolidation of its entire
iron ore mining assets under Mastercroft.
The consolidation aims to simplify the corporate structure of Evraz Holding and improve its operating and financial reporting structures.
In addition, it will also contribute to the company's attempts to adopt a more transparent structure.
Transparency is vital for Evraz Holding as it strives to become more active in the global markets.
Severstal and
MMK have already adopted rather transparent postures by clearly stating their assets and shares and by increasing their shares and assets in the global markets.
Evraz Holding is not only
Russia's largest steelmaker, but it is also the one with the darkest side. In 1999 and 2000, the company was caught in the middle of fierce mafia clashes between Iskender Makhmudov and Alexander Abramov. The company owes most of its current giant structure to the black politics of
Russia during that time.
The transfer of the
iron ore mining shares to a company with a registry outside of
Russia can also be perceived as a means of protecting the company's owners against any possible counter developments arising from the current political environment. Putin's government has made great attempts in eliminating mafia in the business life of
Russia, but Evraz Holding still shows some ties to the black history of the post-USSR period.
Now, the group has started to form a real corporate structure through consolidation of its iron mines. Evraz is expected to continue by consolidating several of the group's steel plants.
Kachkanarsky is the fourth largest iron-ore producer in
Russia. The mine, which boasts an annual capacity of 10.9 million tons and which contains 3 billion tons of reserves, produced nearly 9 million tons of
iron ore last year.
Vysokogorsky ranks 12th in terms of size among iron-ore mines. It produced 1.3 million tons last year, and contains reserves of 175 million tons. With crude steel capacity to produce 15.5 million tons per annum, the Evraz group is now roughly 75% self-sufficient in iron-ore supply.
The worldwide squeeze on iron-ore supplies for steel making has been driving up prices. This is not particularly a problem in
Russia, since
steelmaking groups claim ownership to the vast majority of
Russia's iron-ore mines. This allows the Russian companies to concentrate their profit-taking on the
steelmaking end.
According to a recent report by Maxim Matveyev of Alfa-Bank in Moscow, the principal iron-ore producers should be able to raise prices 50-percent on average this year. This means their after-tax income should jump 122-percent.
At 97 million tons,
Russia currently ranks fifth in the world in terms of iron-ore
production. The country, which holds an 9% share in the global market, trails
China,
Australia,
Brazil, and
India. However,
Russia's crude ore reserves, which the US Geological Survey pegs at 25 billion tons, put the country ahead of
Brazil and most others.
Less than 3% of the shares of the top-4 Russian iron-ore combines (the standard Russian abbreviation is GOK) are freely traded on the market, and all are rated as carrying the risk of low transparency. Several publicly disclosed acquisitions, however, enable Matveyev to estimate market capitalization of Kachkanarsky at $ 1.1 billion. It trails Lebedinsky GOK ($ 2.6 billion) and Mikhailovsky GOK ($3 billion). Both of the latter are controlled by Moscow businessman Alisher Usmanov. Novolipetsk steel group's Stoilensky GOK,
Russia's third-ranked iron-ore producer, has an estimated market cap of $ 1.2 billion.
The Russians trail far behind Brazilian iron-ore producer CVRD, which boasts a market cap of $ 36.2 billion, but they are closing in on South
Africa's Kumba Resources, which has a market value of $ 3.3 billion. CVRD,
BHP Billiton and
Rio Tinto dominate the world trade in iron-ore, supplying roughly 70% of total seaborne movement. Russian iron-ore exports last year amounted to 19.2 million tons. That is equivalent to about 17% of aggregate output; and less than 4-percent of global iron-ore exports. Thus, big as the supply of Russian iron-ore is, it has very little impact on international iron-ore supply and demand. It will likely remain this way unless international firms start to mine in
Russia.
Imports of iron-ore to Russian steel smelters currently amount to about 10 million tons, or just 10% of the market. The bulk of this ore comes from Sokolovsko-Sarbaysky GOK in
Kazakhstan, which has become a takeover target of more than one Russian steel group.
Recent news shows that Chinese steelmakers are starting to show an interest in Russian ore instead of Brazilian or Australian. Russian
iron ore is cheaper, and Evraz Holding wants to take advantage of the current situation in the global
iron ore markets. The company is considering raising immediate cash by selling
iron ore and making foreign
investments in
CIS countries or
China, according to some analysts.
The group's EU member
Cyprus-based affiliate will also help the company to hold cash offshore, cash that it can use on foreign
investments.