OAO Mechel (MTL)’s 24 percent decline this year is prompting Veles Capital to recommend buying Russia’s biggest producer of steelmaking coal on prospects recovering demand and a stronger ruble will boost earnings.
American depositary receipts of Moscow-based Mechel (MTLR), which pared a drop of as much as 1.4 percent to close little changed at $6.43 in New York yesterday, have slid the most in 2012 of the 14 Russian stocks included in the Bloomberg Russia-US (RUS14BN) Equity Index. Futures expiring Dec. 17 on Russia’s RTS Index added 0.3 percent to 149,180 in New York as crude, the nation’s biggest export earner, rose for the first time in six days.
Mechel shares have been sinking as the company restructures some of the $8.8 billion of debt it owed at the end of the first half that made it the most indebted Russian mining company after aluminum producer United Co. Rusal. (486) Mechel will report today that third-quarter net income almost quadrupled to $94.2 million from $25.7 million a year ago, according to the median of six estimates compiled by Bloomberg. The ruble’s 4.7 percent advance versus the dollar this year reduces the cost of debt repayments for the company, Aton Capital says.
“The market extremely undervalues the stock and overestimates risks associated with Mechel,” Ivan Manaenko, head of research at brokerage Veles Capital, said by phone from Moscow yesterday. “There is potential for growth there. We expect an increase of demand for steelmaking coal from China and more demand for thermal coal in Russia and Europe because of a cold winter.”
The Market Vectors Russia ETF (RSX), the largest dedicated Russian exchange-traded fund, rose 0.8 percent to $29.06 yesterday, the highest level since Oct. 22. The RTS Volatility Index, which measures expected swings in the stock futures, slipped 4.2 percent to 22.8 points. The Bloomberg Russia-US gauge, which tracks the most-traded Russian companies in the U.S., climbed 0.6 percent to 97.
Mechel rallied 2.8 percent to 197.4 rubles, or the equivalent of $6.43, in Moscow yesterday in the steepest one-day advance since Oct. 5. The surge narrowed the ADR’s premium over the shares traded on Russia’s Micex Index to 0.03 percent, from 2.9 percent on Dec. 10. The 30-stock Micex was little changed yesterday at 1,448.43, after gaining as much as 0.4 percent.
The company, which reported an $823 million loss in the second quarter amid falling coal prices, got banks to agree to an amendment and restatement agreement over its $1 billion syndicated loan, according to a Dec. 5 statement. The loan, which matures in 2015, would have required $600 million be paid back next year in monthly installments. The repayments will be delayed for 12 months, Mechel said.
“Those who think Mechel will get through its many problems, they buy at the current price levels,” Aleksei Belkin, who manages about $400 million in equities as chief investment officer at Kapital Asset Management LLC, which owns Mechel stock, said by phone from Moscow yesterday.
The ruble was little changed at 30.716 per dollar yesterday, after strengthening 0.6 percent on Dec. 10. Futures expiring in December on Russia’s currency indicated strengthening for a fourth day yesterday, rising 0.1 percent to 30.73 per dollar.
“The stronger the ruble, the smaller Mechel’s debts are,” Ilya Makarov, an analyst at Aton Capital in Moscow which rates Mechel sell, said by phone from Moscow yesterday. “The foreign exchange rate makes a dramatic difference for Mechel, because of the company’s huge debt.”
Signs China’s economy is recovering from its seven-quarter slowdown bolsters the outlook for coal prices and Mechel, according to Veles’ Manaenko.
Chinese industrial output and retail sales rose more than economists predicted in November, data released Dec. 10 showed. The world’s second-largest economy may grow 8 percent in 2013, the official People’s Daily reported yesterday, citing Zhu Baoliang, chief economist at the State Information Center. The government set a 7.5 percent expansion target for 2012, the lowest goal since 2004.
Eastern Europe has been hit by a wave of cold Siberian air and above-normal snowfall, triggering a surge in demand for natural gas and electricity across the region. Temperatures dipped below minus 20 Celsius (minus 4 Fahrenheit) throughout the region and at least 17 people have been killed.
The freeze “will boost demand for thermal coal,” Manaenko said. “Prices for steelmaking coal tend to rise when thermal coal prices rise, so Mechel will benefit from this cold weather.”
ADRs of OAO GMK Norilsk Nickel (NILSY), the world’s largest producer of the metal, rose 0.6 percent to $17.75 yesterday in New York, the highest level since May 1. Trading volume was more than twice the average daily volume over the past three months, data compiled by Bloomberg show. Norilsk’s shares in Moscow fell 2 percent to 5,266 rubles yesterday, or $171.47. One ADR represents a 10th of an ordinary share.
Russian billionaire Roman Abramovich may increase his Norilsk stake by 4.1 percent to 7.5 percent or as much as 10 percent, the RIA Novosti newswire reported yesterday, citing an unidentified person with knowledge of the discussions. John Mann, Abramovich’s spokesman, declined to comment when called yesterday.
Rusal, the world’s biggest aluminum producer, owns 25.1 percent of Moscow-based Norilsk, and billionaire Vladimir Potanin’s Interros Group has a 28 percent stake. Abramovich’s Millhouse LLC will own 5.87 percent of Norilsk after the company retires a 17 percent stake in treasury stock, Rusal and Interros said yesterday in a joint statement.
The S&P GSCI Index tracking prices of 24 commodities gained 0.1 percent to 631.93 yesterday, rising for the first time in six days.
Crude for January delivery rose 0.3 percent to $85.79 a barrel on the New York Mercantile Exchange, while Brent for January settlement on the London-based ICE Futures Europe exchange added 0.6 percent to $108.01 a barrel. Urals crude, Russia’s chief export oil blend, climbed 1.1 percent to $106.63 yesterday.
United Co. Rusal, the world’s largest aluminum producer, rose 0.4 percent to HK$4.84 in Hong Kong trading as of 10:18 a.m. local time. The MSCI Asia Pacific Index gained 0.5 percent.
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