OAO Mechel will rebound as investors dismiss concerns the Russian coal company will lose a mining license to buy shares trading three times cheaper than peers, Otkritie Financial Corp. and Renaissance Capital say.
Mechel, Russia’s biggest maker of coking coal for steel production, slid to $9.81 in New York on March 23, the lowest level in almost three weeks. The stock trades for 5.4 times estimated earnings, compared with an average 14.6 times for coal stocks listed on the Standard & Poor’s 500 Index. Futures expiring in June on Moscow’s dollar-denominated RTS Index gained 0.6 percent to 162,740 in U.S. trading.
Moscow-based Mechel broke license agreements at parts of six deposits in Russia’s Far East run by its Yakutugol unit, the nation’s environmental regulator said on March 22. The body also found violations by Mechel’s South Kuzbass unit in Siberia, two people familiar with the investigation who declined to be named said. Investors have been in a “panic” that Mechel will lose a license as punishment, according to Otkritie.
“The license termination is very unlikely, there are very few cases in Russian history of license revocations and I don’t think they found sufficient reasons,” Denis Gabrielik, an analyst at Otkritie that rates the company a buy, said by phone from Moscow on March 23. “Mechel is undervalued. My target price is $16.60.”
Mechel fell 0.2 percent to $9.81 in U.S. trading on March 23, the lowest level since March 6. The company’s American depositary receipts declined 9.8 percent last week, the biggest weekly drop since the five days ended Feb. 10. The stock slipped 8.6 percent last week to 289.40 rubles, the equivalent of $9.89, on Moscow’s Micex Index.
The ADR’s valuation has declined from this year’s high of 6.5 times estimated earnings on Feb. 7. Consol Energy Inc., the third-largest U.S. coal producer and a member of the S&P 500’s coal and consumable fuel sub-industry index, trades for 15.3 times estimated earnings, while the ratio for Peabody Energy Corp., the largest U.S. producer of the commodity, is 9.7.
The S&P 500 coal producers index added 0.4 percent on March 23.
The deposits at Yakutugol are Mechel’s most profitable asset, accounting for about 25 percent of earnings before interest, taxes, depreciation and amortization last year, according to George Buzhenitsa, an analyst at Deutsche Bank AG in Moscow. They include the Elga coal field, Russia’s largest.
Mechel will get time to resolve the breaches at Yakutugol, and the prospect of terminating licenses will only be contemplated should the company fail to address the issues raised, Yelena Koverga, a spokeswoman for Russia’s Ministry of Natural Resources, said by phone on March 22. The ministry and Mechel both declined to comment on the possibility of licensing violations at South Kuzbass.
“If Mechel loses their license, the whole sector will come to a halt,” Boris Krasnojenov, a metals and mining analyst at Renaissance Capital, said by phone from Moscow. “The probability of Mechel losing the license is very low. Below $10, Mechel is very attractive for investors.”
Mechel may move an initial public offering of its coal and iron-ore mining unit OAO Mechel-Mining to New York this year after delaying a planned $2 billion sale in London in September, three people with knowledge of the matter said in December, declining to be identified because the information is confidential. The parent company has traded on the New York Stock Exchange since 2004.
United Co. Rusal, the world’s largest aluminum producer, dropped 2.2 percent to HK$5.69 in Hong Kong trading as of 11:39 a.m. local time. The MSCI Asia Pacific Index fell 0.2 percent today amid concern earnings of Asian exporters are deteriorating.
The Bloomberg Russia-US Equity Index of Russian companies listed in New York added 1.6 percent to 108.12 on March 23, curbing its loss last week to 2.8 percent. The Market Vectors Russia ETF, a U.S.-traded fund that holds Russian shares, rose for the first time in six days, gaining 1.7 percent to $31.34. The exchange-traded fund tumbled 3.9 percent last week, the biggest weekly drop since the five days ended Dec. 9.
ADRs of OAO Gazprom, the world’s biggest natural gas producer, rose 2.2 percent to $12.54 in New York on March 23, reducing the weekly decline to 6.2 percent, the most since the second week of December. The U.S.-listed stock traded at a 0.8 percent premium to Micex shares, which gained for the first time in six days to 182.28 rubles, or $6.24.
No More Increases
Gazprom tumbled last week as Alfa Bank and Credit Suisse Group AG said the state-controlled company’s tax burden will be boosted to pay for President-elect Vladimir Putin’s election promises to increase pensions and state-employee salaries. Taxes for Gazprom, the nation’s gas export monopoly, may rise by as much as $22 billion a year over the next five years, according to Alfa’s worst-case scenario.
Coupled with the specter of higher taxation, Putin, currently the prime minister, said on March 23 that there will be no extra increases in Russian domestic natural-gas prices this year for producers including Gazprom. Companies sought additional tariff increases after Russia boosted extraction taxes this year, Putin said in Kirishi, near St. Petersburg.
“The discussion will end with some sort of compromise,” said Alexei Kokin, a senior oil and gas analyst at UralSib Financial Corp. in Moscow. “Gazprom won’t get the tariff increase it wants but will get some kind of compromise.”
The 30-stock Micex Index climbed 0.7 percent to 1,540.97 on March 23, paring its weekly slide to 4.8 percent. The RTS rose 0.9 percent to 1,668.41, its first increase in six days.
Sberbank Better Bet
The RTS Volatility Index, which measures expected swings in the index futures, slipped 1.1 percent in New York trading on March 23 to 30.29.
OAO Sberbank, Russia’s largest lender, may be a better bet for stock investors than smaller rival VTB Group because it has greater potential for growth and a higher-quality portfolio of loans, Credit Suisse Group AG analyst Hugo Swann said in a research note e-mailed on March 23.
Sberbank’s ADRs jumped 4.1 percent to $13.56 in New York on March 23, the biggest one-day advance since Feb. 24, making it the best performer on the Bloomberg Russia-US gauge. Sberbank rose 1.6 percent on the Micex to 97.50 rubles on March 23, or the equivalent of $3.33.
VTB, the country’s second-biggest bank, added 3.3 percent in London to $4.72, down 5.4 percent in the week.
Credit Suisse raised its target price on Sberbank’s Moscow shares to $4.30 from $4.20 and cut VTB’s target price in London to $5.10 from $5.50. The Zurich-based lender rates Sberbank the equivalent of buy and VTB the equivalent of sell.
Crude oil climbed on March 23 after Reuters reported that Iranian oil exports will drop by 300,000 barrels a day this month because of tighter sanctions. Oil for May delivery advanced 1.4 percent to $106.87 a barrel on the New York Mercantile Exchange, while Brent oil for May settlement gained 1.6 percent to $125.13 on the London-based ICE Futures Europe exchange. Urals Crude, Russia’s chief export blend, rose 1.7 percent to $121.83, snapping a four-day drop.