Russian Railways May Get $1.9 Billion to Buy Mechel Rail Line

OAO Russian Railways may receive 70 billion rubles ($1.9 billion) from the state-run Wellbeing Fund to buy a coal track from OAO Mechel (MTLR) as part of plans to bail out the heavily indebted mining company.

The government is discussing the financing as one option to help the mine operator, Russian Railways Chief Executive Officer Vladimir Yakunin said according to reports today by Interfax and RIA Novosti. Russian Railways’ press-service confirmed Yakunin’s comments when contacted by Bloomberg News.

The state rail monopoly can’t afford the acquisition without the government money, Interfax reported.

Mechel, employing about 70,000 people, is among Russia’s most-indebted mining businesses, owing about $9 billion mostly to state lenders. The Moscow-based miner has been hit by falling prices for coking coal as demand from steelmakers for the raw material weakens because of sluggish global economic growth.

The miner in August proposed Russian Railways buy the 321-kilometer (200 mile) track to the Elga coal deposit in Yakutia built with an investment of 70 billion rubles, Vedomosti said at the time, citing unidentified people. Russian Railways rejected the option in April without money from the state.

Mechel renewed the proposal after Igor Zyuzin, its biggest shareholder, refused to dilute his stake by allowing an issue of new shares that would have been exchanged for debt held by OAO Gazprombank, OAO Sberbank and OAO VTB Bank (VTBR), the newspaper reported. Another option to sell 180 billion rubles of bonds convertible into Mechel shares was shelved after state-run Vnesheconombank said in July it would lose money on the deal.

Mechel got bank waivers at the end of last year and agreed with VTB on an extension on more than 33.8 billion rubles of loans in July. Arseniy Palagin, a spokesman for the coal miner, declined to comment today.

Mechel rose 1.7 percent to 36.9 rubles at noon in Moscow.

To contact the reporter on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Tony Barrett, Ana Monteiro

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