Mechel’s Moscow Discount Shrinks on Rail-Supply Outlook

Photographer: Andrey Rudakov/Bloomberg

Lengths of steel train rails sit on the production line during manufacture in the universal rail and beam rolling mill at OAO Mechel's metallurgical plant in Chelyabinsk, Russia. Close

Lengths of steel train rails sit on the production line during manufacture in the... Read More

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Photographer: Andrey Rudakov/Bloomberg

Lengths of steel train rails sit on the production line during manufacture in the universal rail and beam rolling mill at OAO Mechel's metallurgical plant in Chelyabinsk, Russia.

A rally in Moscow cut OAO Mechel (MTL)’s discount relative to the U.S. stock to a two-month low as the steelmaker said it may supply rails to the state-run railroad.

Mechel surged 9 percent in Moscow, trimming the price gap to the U.S.-listed shares to 56 percent, the narrowest since March 13. The American depositary receipts rose 8 percent to $2.15 in New York as the Bloomberg Russia-US Equity Index of the most-traded Russian stocks in the U.S. added 1.2 percent to a five-week high of 84.29 yesterday. RTS stock-index futures rose 0.4 percent to 120,690 in U.S. hours.

The steelmaker rallied after OAO Russian Railways said it has stopped importing rails and will replace those supplies with material from local companies, including Mechel and Evraz Plc. Most other stocks on the Micex Index also gained as investors bet that the European Union’s latest sanctions tied to the crisis in Ukraine won’t hurt Russia’s economy.

“Rail supplies to Russian Railways is a positive factor that plays well in the context of a new, very weak round of sanctions by the European Union,” Ilya Balakirev, a senior analyst at UFS Finance Investment Co. in Moscow, said by phone. “The gap between the ADRs and the local shares is unjustified and should shrink further.”

Mechel has the capacity to produce as much as 120,000 tons of rails in 2014, said Arseniy Palagin, a Mechel spokesman in Moscow. Certification tests will determine how much of that will be supplied to the Russian Railways this year. The EU imposed sanctions on companies in Crimea for the first time, a day after pro-Russian separatists in Ukraine’s eastern regions held votes on independence.

Separatist Movements

“Mechel needs a rally in coal and steel prices for the stock to recover,” Kirill Chuyko, head of equity research at BCS Financial Group, said by phone from Moscow. Chuyko, whose recommendations produced the best relative returns of all the securities he covered over the last year, rates the stock a sell.

Twelve of 16 analysts surveyed by Bloomberg recommend selling Mechel, according to data compiled by Bloomberg. Two, including UFS’s Balakirev, rate it a buy. The remaining two advise clients to hold the stock. At least two ratings are under review.

In Ukraine, 90 percent of voters in Donetsk backed a plan to declare it a sovereign state. Separatists in neighboring Luhansk announced a similar move.

The European Union imposed sanctions on companies in Crimea for the first time and threatened more measures. Russian stocks advanced as the sanctions didn’t target Russian industries.

Ukraine’s Gas Bill

“The markets haven’t factored in the worst-case scenario yet,” Geoffrey Blanning, head of emerging market debt, currencies and commodities at Schroder Investment Management Ltd., which oversees $467 billion in assets, said in an interview in New York yesterday. “This is not an opportunity to us yet.”

Blanning said he doesn’t own Russian and Ukrainian assets.

OAO Gazprom was the only member of the Bloomberg index of Russian stocks trading in the U.S. that fell yesterday, declining 0.8 percent to $7.82. The state-owned natural gas monopoly said Ukraine must pay for next month’s supplies by June 2 or face a shutoff the next day.

The cut off “is certainly a risk,” Blanning said. “Nobody knows what Putin will do.”

Russia is moving Ukraine to prepayments because it owes $3.5 billion for gas delivered in 2013 and through April this year, Chief Executive Officer Alexey Miller said at a meeting with Russian Prime Minister Dmitry Medvedev.

Rusal Results

Futures contracts on Gazprom’s Moscow-listed stock expiring in June were little changed in the U.S. hours yesterday.

Ruble futures expiring this month showed the currency weakening against the dollar. The ruble has dropped 6.3 percent this year, the worst-performing emerging-market currency after Argentina’s peso.

The Market Vectors Russia ETF (RSX), the biggest U.S.-traded exchange-traded fund that holds Russian shares, gained 1.4 percent to $24.04, trimming decline this year to 17 percent.

The RTS Volatility Index, which measures expected swings in the stock-index futures, decreased 0.7 percent to 33.27.

Russia’s Micex Index climbed 0.7 percent today, extending gains to a fifth day. That’s the longest winning streak this year.

To contact the reporter on this story: Halia Pavliva in New York at hpavliva@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net Richard Richtmyer

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