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.
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