RUXX Report: Western Investors Are to Get Access to Russian Strategic Mining Assets

New York -- Amid the  economic slowdown in the Russian metals and mining industry, Western investment banks are exploring opportunities to gain ownership over Russian metals and mining assets. Currently, they are undervalued and their prices are likely to rise as demand for steel and ore increases worldwide. However, at present time, most of the largest Russian metals companies are in desperate need for liquidity and seek financing abroad, which might give Western banks a unique opportunity to secure ownership of strategic metals and mining assets in Russia.

According to experts, Metalloinvest, one of the major Russian metals companies and one of the largest steel and ore producers, is said to be in talks to issue convertible bonds -- debt notes which, in case of default, can be converted into company's shares. Vladimir Zhukov, Executive Director, Metals and Mining Research for Nomura, says that Metalloinvest has a slim chance to get financing unless it's backed by the companies ore deposits: "In current economic climate, Metalloinvest will have hard time securing additional financing. Any bonds issued by Metalloinvest are likely to be ignored by the market unless the bonds are convertible and backed by the company's shares and underlying assets", says Zhukov. Convertible bonds, which are becoming the prevailing form of financing of Russian companies such as Metalloinvest and Evraz, are one of the ways Western financial institutions can gain access to Russian assets.

Japan-based Nomura, one of the largest investment banks in the world, is one of the likely underwriters of Metalloinvest's convertible bonds. "We follow Metalloinvest closely, but we could not confirm any IPO or debt issuing plans at this time," said Vladimir Zhukov. Michael Thompson, senior analyst for RUXX Index, a think tank tracking Russian stocks and bonds traded on Western exchanges, says that Western investors should consider not only financial risk of owning such bonds, but also political. "For example, by becoming Metalloinvest's partner, Nomura will gain partial control over Udokan Ore deposit, which Metalloinvest secured recently, amid growing concerns that it does not have enough money to cover the Udokan development license. However, the Udokan ore deposit is considered "strategic" by the Russian government. The law currently bans non-Russian nationals from owning strategic assets, including the deposit. If Metalloinvest defaults on the convertible notes, foreign banks become stakeholders in Metalloinvest." says Thompson.

The Russian government has been very protective of its industrial giants, but amid the economic slowdown it might not be in the position to ban Western capital from entering the industry.

To contact the analyst, please write to m.thompson@ruxxindex.com

RUXX Report: Norilsk Nickel Released Initial Results for 2008 And Solid Porjections for 2009

New York -- March 26, 2009 -- Norilsk Nickel, world's largest nickel producer, is has released its initial 2008 results and projections for 2009 today. According to Vedomosti, Russian business daily newspaper, the figures, showing large cash reserves and $2 billion in expected earnings for 2009 are likely to calm the investors, who grew increasingly worried about the company amid recent investigation of Norilsk Nickel's finances by the Russian government. 

$2 billions (EBIDTA) forecast is higher than that of the analysts. According to Vedomosti, Russian business newspaper, Norilsk has been cutting costs aggressively and optimizing production schedule in anticipation of drop in demand for nickel.  According to the company's CEO Vladimir Strzhalkovsky, as of last month the company had  $1 billion in cash reserves.

The company is likely to receive additional $400 to $500 million from sale of  treasury stocks, according to Kommersant newspaper. Experts agree that Norilsk Nickel, which for the most of 2008 was managed by the Interros team, and owned by Vladimir Potanin, Oleg Deripaska, Alisher Usmanov and other Russian and Western shareholders, was one of the best-managed Russian metal giants and coped well with the worldwide recession: "It's important to have strong liquidity positions at present moment. Those who do, have higher bargaining power with suppliers and are less vulnerable to credit market fluctuations", - says Michael Thompson, RUXX Index research director, who studies Russian companies listed on Western exchanges.  

The $400 to $500 million bonds sale comes from the controversial buyback program, initiated by Norilsk Nickel late last year. The company's board, as it was contractually obligated, has authorized the buyback from the minority shareholders despite the fact that the price of the assets was almost 300% higher than the market price. However, by going forward with the buyback, the company avoided the costly legal battle with investors and avoided damaging its reputation with the western financial community. Norilsk has decided to sell the treasury stocks instead of reducing the outstanding stock base, strengthening its liquidity position and limiting shareholders' exposure to market fluctuations.

The investors worried again after the government opened an investigation of the buyback program several days ago. Some observers speculate that the investigation is initiated by Alisher Usmamov, who owns a 5 percent stake in Norilsk Nickel. The Financial Times quoted Usmanov "sharing the government's concern about a seres of deals that began last summer."  Last year, Mr. Usmanov expressed interest in gaining control over Norilsk by merging it with Metaloinvest, another metals and mining giant. The merger was not approved by the Russian  government.  

"In Russia, government connections are often used for corporate takeovers", - says Michael Thompson: "However, in case of Norilsk, the takeover is highly unlikely. At the meeting with the shareholders and CEO of the metals giant, President Medvedev made it plain that Norilsk is a solid company and does not require any emergency merger assistance."

RUXX Index tracks and analyzes Russian companies listed on offshore exchanges.
Michael Thompson
RUXX Index
(646) 257-2003
michael.thompson@ruxxindex.com 

Russian metals and mining giants lobby for massive merger

New York – February 1, 2009 – Severely weakened by the economic crisis, Russia’s top metals producers are embracing a proposal to merge into one massive company. The merger, which is subject to state approval, would make the industry less vulnerable to the rapid shifts in demand that characterize economic downturn. But while the metals giants agree on the basic plan, they differ about how much government support is needed.

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Western Investors are increasingly concerned about Russia’s business practices after several of the country’s most prominent businessmen backed out of their commitments to major Western investment funds.

Investigative report "Western Investors Concerned about Investment Climate in Russia", prepared by RUXX analytical department and licensed under Creative Commons, is available for free download.

“The international credit crisis is hurting even Russia's wealthiest, and it is not just shrinking their bank accounts. As credit dries up and commodity prices plummet, Russian billionaires are selling assets, refinancing and, in some cases, canceling formal deals,” writes Heidi Brown of Forbes.

Most notably, a dispute between Russian metals tycoon Mikhail Prokhorov and the minority shareholders of power generator TGK-4 has resulted in an appeal to President Dmitry Medvedev himself. The TGK-4 shareholders turned to the Russian president for help after Prokhorov reneged on a promise to buy out their stakes in the wake of the financial crisis. 

Russian Industrial Leaders Index: Russian Economy Keeps Growing Amid Economic Crisis

New York – October 2, 2008 – In the third quarter of 2008 foreign investors pulled funds out of Russia amid the global economic crisis, sending RUXX, an economic index tracking Russian shares traded on Western exchanges, down 31% to 337. The losses of Russian companies came after two years of robust growth, when RUXX reached 1000 points.

“Russia is now part of the global economic landscape and cannot be immune to the world financial crisis” – says Michael Thompson, financial analyst. “There is still lag between economic cycles in the US and Russia - the effects of the year-old housing bubble in the US did not reach Moscow until a month ago, when US investors started to cash out. However, Russia is certainly a part of the global economy now and will see the effects of the economic crisis” – adds Thompson.

Western investors working in Russia see the economic crisis as an opportunity rather than a threat. Ravi Abnaghan, senior expert with the Center of Economic Policy in New York and Moscow, says: “The crisis is the ultimate test for Russian companies and we are very interested to see which industries are more resilient to the financial pressure. However, overall the fundamentals for the country are very strong and we think the crisis is a very opportune time to increase our position in Russian companies. The market here has huge potential and will grow very fast once the liquidity crisis is over.”

Leonid Reiman, advisor to the President of Russia and Chairman of the RUXX advisory board, said in the interview in Moscow: Russian economy is growing, even during the global economic crisis and its attractiveness for western investors has increased.”


About the Index:

Russian Industrial Leaders Index (RUXX) is calculated by Dow Jones and  tracks the performance of the U.S. and U.K. Exchange-listed Depositary Receipts in American (ADR) or Global (GDR) form, New York Shares, and Global Shares of the Russian companies that are listed for trading on The New York Stock Exchange (NYSE), American Stock Exchange (AMEX), London Stock Exchange (LSE) and Nasdaq Stock Market (NASDAQ). It serves as a benchmark of attractiveness of Russian stocks for the western financial community. Currently, the Index includes thirty companies and its capitalization reaches 300 billion dollars.

Visit www.ruxxindex.com for detailed data and quarterly report.