Commodity prices collapse Russian metal companies stocks in 2012

Russian metallurgy sector has been in a tight situation since late 2011 and throughout 2012, mainly due to global economic problems, including the growing eurozone debt. Despite the forecasts of most experts, who expected Russian metallurgy companies to remain rather stable in 2012 and mainly flat on the year, none expected that their shares and commodity prices would reach rock bottom in 2012. This year finally dispelled the illusion that the eurozone countries are stable.

After a drop in August, analysts expected that the market would recover within the next two months amid a possible rebound in commodity prices and economic growth in China, but in October it became clear that there will not be any positive movements this year.

Considering the events of 2012 are now coming to an end, it may be called the year of unrealized expectations and hopes.

The highly discussed deal on the merger of two Russian precious metals giants Polyus Gold and Polymetal Plc did not take place, state owned uncut diamond mining giant ALROSA did not make an initial public offering (IPO), moreover, there were no IPOs in the metallurgy sector at all this year.

The Russian government has not yet held a tender to auction one of Russias undeveloped gold deposits - Sukhoi Log, which is being postponed for already several years, and billionaire businessman Mikhail Prokhorov still has not disposed of his stake in Polyus Gold.

Following media statements on the possible sale of Prokhorovs 37.8% stake in Polyus Gold to the second largest shareholder of the company - Suleiman Kerimov - in September, a large number of investment banks have been speculating with the companys shares on the market, however, the agiotage subsided given the lack of official information by the end of the year. At the same time, Polyus Gold at last succeeded in moving to London and obtain a primary listing on the London Stock Exchange (LSE), but the last among the three back-settlers (Evraz, Polymetal and Polyus), which were cleared to move to the British capital in late 2011.

Based on analysts and experts views, Metals & Mining News has compiled a rating of Russian metallurgical companies, taking into account their production and financial results, as well as compliance with development plans and projects.

Transaction of the year - the amicable agreement between shareholders of Russian metals giant Norilsk Nickel.

Following the resolution of the shareholder conflict, the company became unique for the Russian stock market and metallurgy sector with its dividend yield of over 10%, in 2012 it may rise to 15%, said Oleg Petropavlovsky, analyst from BCS.

Indeed, the long-term and continuous conflict between the major shareholders of Norilsk Nickel - Oleg Deripaska, CEO of UC RUSAL, and Vladimir Potanin, president of Interros holding, - has come to an end. It began following RUSALs acquisition of a blocking stake in Norilsk Nickel in April 2008. RUSAL had always been dissatisfied with Norilsk Nickel, starting from the structure of the board of directors, management work, the companys development strategy and market capitalization drop, as well as infringements of shareholders interests.

The aluminum giant challenged Norilsk Nickels buyback offers and launched numerous court claims against the issues concerning the companys operations.

The market positively reacted to the conflicts outcome. The companys shares closed at 5,750 rubles on the Moscow Exchange as of December 20, gaining 24.5% since the first announcement of the possible agreement between the shareholders on November 15 and 14.7% from the beginning of the year.

The company of the year - Polymetal, according to Metals & Mining News rating.

Despite the overall negative market conditions and economic events, the company is continuing to develop successfully, launch new deposits, buy and hold negotiations on the acquisition of new assets; it demonstrates steady growth in production and financial results, and on the stock market. Regardless of the overall drop in share prices in the middle of the year, the company was able to return to the figures from the beginning of the year and exceed them. As of December 20, Polymetal closed at 116.9 pounds on the LSE, +7.86% from the beginning of the year.

Andrei Shenk, analyst at Investcafe, considers Evraz acquisition of a stake in coal producer Raspadskaya as the transaction of the year. As a result, Evraz gained control over 82% in Raspadskaya and become the largest producer of coking coal in Russia. As of December 20, Evraz shares closed at 267 pence on the LSE, down 28.7% from the beginning of the year.

Last year, opinions about the Outsider of the year were split, but this year, Mechel wins hands down. Similar to 2011, the company obtained this rating due to its large debt burden, which continued increasing this year, but more slowly.

After coking coal prices dropped by more than one third since the beginning of the year, the company announced its intention to sell some of its assets, the production capacities of which were later suspended. According to the 2012 results, Mechel breached its loan covenants, while its debt situation is becoming more serious, said Petropavlovsky from BCS.

Mechel lost out most in shares, which slipped 30% due to unfavorable market conditions. High credit risks were behind that, Shenk from Investcafe said.

Regardless of the negative background, Mechels divesture program envisaging sale of non-core and other assets is in the active stage and is expected partly to reduce the companys debt in the future. The company plans to sell the aforementioned assets, as well as offer 25% in its mining division - Mechel Mining - by the end of the first half of 2013. Also, Mechel struck a successful deal in the end of 2012. The company will acquire the Vanino Sea Port for 15.5 billion rubles in a consortium with foreign investors. Despite the size of the deal, it will not affect the companys debt burden at all. As of December 20, Mechel shares closed on the Moscow Exchange at 208.5 rubles, down 26.3% since the beginning of the year.

Lenar Khafizov, analyst at Prime Mark, considers two Russia-focused gold miners - Highland Gold Mining (HGM) and Petropavlovsk Plc - as good matches for two categories, outsider of the year and fall of the year.

Both companies lost more than 50% in their market value this year. Notably, that Petropavlovsk shares slumped amid external factors - market conditions, while HGM shares slipped due to internal causes, such as production plans, the launch of new projects, as well as the loss of a large shareholder, Khafizov said.

In late April, Canadas Barrick Gold Corp, the worlds largest gold producer, sold its entire 20.37% stake in HGM to institutional investors, as the company considered HGM not to be key for its future strategy. In November, HGM announced plans to delay the launch of a mining and processing plant at the Belaya Gora deposit to April 2013 from late 2012.

Regarding the newcomer of the year, Metals & Mining News agrees with the opinion of Petropavlovsky from BCS - it is Nordgold. The company was spun-off from steelmaker Severstal at the beginning of the year. In fact, it is the only company which placed shares on the exchange this year, but we cant say that it was very successful as the companys shares lost 40% in price since the time of placement, the analyst said. As of December 20, Nordgold shares closed at U.S. $4.6 on the LSE, down 41% since the beginning of the year.

As for the Driver of the year, this year it was negative. Falling commodity prices - on coal and iron ore - led to a decrease in steel prices, which in turn became the cause of the overall fall in metallurgy stocks, BCS analyst said.

I would name the overall unfavorable market conditions as the negative event of the year. In particular, there were no negative events as such in the metallurgy sector this year, Shenk from Investcafe added.

As mentioned earlier, the fourth quarter of the year is traditionally weak for metallurgy companies, and still there is no trend for recovery in the sector. Most experts hold the opinion that nothing positive will occur before March 2013. Currently, investors are at the stage of evaluating the real state of affairs.


25.12.2012 10:37

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