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Cheapest Valuation in 3 Months Buoys Mechel: Russia Overnight

OAO Mechel rose for the first time in six days in New York after Russia’s biggest coal producer for steelmakers traded at its cheapest level since January.

Mechel climbed 2.2 percent yesterday, after sliding 9.1 percent in the five days to April 10 when it traded for 4.96 times earnings estimates, the least since Jan. 17 and three times cheaper than the average valuation for coal stocks listed on the Standard & Poor’s 500 Index. Futures expiring in June on Moscow’s dollar-denominated RTS Index fell 0.3 percent to 156.035 in U.S. trading.

American depositary receipts of Mechel have tumbled 10 percent since March 22, when Russia’s environmental regulator said the Moscow-based company broke license agreements at deposits run by its Yakutogol unit in the nation’s Far East. Exacerbating the drop, Mechel said on March 29 that it was seeking loan waivers on expectations falling coal prices caused it to breach financial covenants. The company sold 15 billion rubles ($506 million) of three-year bonds on April 10.

“It’s better to buy Mechel now, it’s cheap enough and the risk of buying the stock now is higher, but so is the potential benefit,” Oleg Petropavlovskiy, a mining and metals analyst at Moscow-based Broker Credit Service, said by phone yesterday. “It’s been clear to everyone that the license won’t get taken away, but the market hasn’t realized that yet” and the successful debt sale “is an indicator that the company is financially stable,” he said.

Third-Cheapest ADR

The Bloomberg Russia-US Equity Index of Russian companies traded in the U.S. rose 1.8 percent to 104.10 yesterday, the biggest one-day advance since Feb. 24. The Market Vectors Russia ETF, a U.S.-traded fund that holds Russian shares, climbed 1.9 percent to $29.79, the steepest jump since March 26.

Mechel advanced to $8.83 in U.S. trading yesterday, the biggest one-day gain since April 2. Mechel ADRs have risen 3.9 percent this year, after tumbling 71 percent in 2011, their biggest annual loss since 2008. The Bloomberg Russia-US Equity measure has climbed 15 percent this year.

The third-cheapest U.S.-traded Russian stock after OAO Lukoil and OAO Gazprom, Mechel’s ADRs traded at a 2.1 percent discount to its Moscow shares yesterday, the most in almost a week. Mechel rose 2.2 percent to 267.30 rubles, or $9.01, on Russia’s Micex Index. One ADR is equal to one ordinary share.

The ratio of outstanding put options to sell Mechel ADRs versus calls to buy them rose to a five-month high on March 29.

Russia’s environmental watchdog said in a statement on March 26 that it hadn’t repealed licenses for Mechel’s South Kuzbass unit. License violations had been found at the subsidiary operating in Siberia, people familiar with the investigation said last month, declining to be identified.

Violations ‘Overblown’

“We’re seeing a steady stream of positive news that’s boosting Mechel,” Boris Krasnojenov, a metals and mining analyst at Renaissance Capital in Moscow, said by phone yesterday. “It successfully closed books for the bond placement, the license violations story was overblown, nobody will take away their licenses. The debt load is big but as long as Mechel has the support of the government it’ll refinance it.”

Mechel had about $9 billion of net debt at the end of last year, and a ratio of net debt-to-earnings before interest, tax, depreciation and amortization of about 3.7, George Buzhenitsa, an analyst at Deutsche Bank AG, said by phone on March 29. The company needs to reduce the ratio to 3.5 or less to meet its covenants, he said. Mechel has $2.66 billion of debt payments due this year, according to a company presentation in December.

The ADRs traded for 5.1 times estimated earnings yesterday, compared with an average 13.25 valuation for coal stocks listed on the S&P 500.

Rising Volatility

Consol Energy Inc., the third-largest U.S. coal producer and a member of the S&P 500’s coal and consumable fuel industry sub-index, trades for 14.7 times projected earnings, while the ratio for Peabody Energy Corp., the largest U.S. producer of coal, trades for a valuation of 8.4.

ADRs of Gazprom, the world’s biggest natural gas producer and Russia’s biggest company, have a valuation of 3.6 times estimated earnings, while the ratio for Lukoil, the country’s largest non-state oil producer, was 4.4 times yesterday.

The RTS Volatility Index, which measures expected swings in the index futures, gained 1 percent to 32.39 points in U.S. trading.

Moscow’s Micex-RTS stock exchange is improving trading access for London-based investors in a bid to expand the range of brokers that can access the bourse, according to spokesman Nikita Bekasov.

Direct London Trading

The introduction of new technology to bolster direct trading access and increase the speed of order flows will enable a wider range of Russia-licensed brokers to trade the market, Bekasov said in an interview from Moscow yesterday. Under the new system, Russian subsidiaries of international brokerage firms will be able to offer direct trading access from the U.K. capital, he said.

The bourse is in the process of selecting partners to provide the technology for the project, Bekasov said.

Russia’s 30-stock Micex Index gained 0.5 percent to 1,505.77 in Moscow yesterday, while the RTS gauge advanced 0.5 percent to 1,615.69.

Oil, Russia’s biggest export earner, rose for the first time in three days after the U.S. Energy Department said that fuel stockpiles declined and as Benoit Coeure, a member of the European Central Bank executive board, suggested the regulator may restart bond purchases for Spain, soothing concerns over the regional debt crisis.

Crude oil for May delivery gained 1.7 percent to $102.70 a barrel on the New York Mercantile Exchange. Brent oil for May settlement added 0.3 percent to $120.18 on the London-based ICE Futures Europe exchange, while Urals crude, Russia’s chief export blend, was little changed at $117.15.

Halia Pavliva in New York at

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