OAO Mechel, Russia’s most indebted mining company, is including Asian lenders in talks to refinance as much as $3.5 billion of borrowings as customers for its coal in China and other countries in the region increase.
“We’ve started to export more to Asia and want to gain some advantage from this,” Chief Financial Officer Stanislav Ploschenko said in an interview. The Asian talks cover $2.5 billion of debt due in 2014 owed to international lenders including European and U.S. banks, and are due to conclude this year. Mechel targets July completion for an agreement with a Russian bank to refinance about $1 billion due in 2013, he said.
Mechel is strengthening ties with Asia as growing economies in China and India bolster coal and steel demand from power producers, builders and manufacturers. The company’s largest development project, the Elga coal deposit in far-eastern Russia’s Yakutia region, is aimed at Asian buyers.
Mechel advanced 0.9 percent to 97.40 rubles in Moscow trading, after earlier rising as much as 3.5 percent.
The company’s efforts to reduce debt, including asset disposals, face headwinds from weakening coal prices, which have dropped 28 percent this year.
“Mechel is taking the right steps to cut its debt and refinance, but even if it succeeds with asset sales, without a recovery in coal prices the company will struggle to earn enough to serve its debt and for maintenance,” said Boris Krasnojenov, an analyst at Renaissance Capital in Moscow.
The coal and steel producer controlled by billionaire Igor Zyuzin had net debt of $9.6 billion as of June 1, a presentation shows. Asia accounted for about 43 percent of its 2012 revenue, up from 35 percent a year earlier. Moody’s Investors Service has a B3 rating on Mechel’s debt, six steps below investment grade, with a negative outlook.
The Moscow-based company is discussing with ratings providers whether its Mechel-Mining unit can be assessed separately, Ploschenko said. The division had a 2012 ratio of net debt to earnings before interest, taxes, depreciation and amortization of 4.6, almost half that of the parent, he said.
The unit is seeking funds for projects including Elga, and a higher rating may lower its borrowing costs. The mining business may sell Eurobonds this year or next should it win a higher rating, according to the CFO.
Mechel is in separate talks with Russian state-run bank Vnesheconombank on funding Elga. “We hope to get a decision from VEB on $2 billion of project financing” by the end of the summer, Ploschenko said. The loan would cover first-phase spending, reducing the urgency to sell a stake in the mining unit, he said.
The company said in September it was considering divesting as much as 25 percent of Mechel-Mining. Mechel sold five unprofitable steel assets in Romania in February for a nominal price of about $70, and agreed in December to sell a power plant in Bulgaria. It plans to offload ferrochrome assets within a month and may also dispose of its Kuzbass Power Sales Co. at about the same time, Ploschenko said.
Mechel’s market value has dropped more than 50 percent this year, approaching the record low reached in January 2009. The coal producer said last month it plans to spend as much as $100 million on a yearlong share buyback to curb further declines in the stock.
“We haven’t started to buy shares yet as we still need approval from certain lenders,” according to the CFO, who said the buyback will be funded from cash flow and won’t boost debt. JPMorgan Chase & Co., appointed broker, will start purchasing stock in the market once approvals are in place, he said.
Mechel’s disposal plans also include the European segment of Mechel Service Global, a steel trader. A first round of bids for the European unit brought in offers only for certain sections of the business, so it will now be split up and offered in parts by the end of the year, Ploschenko said.
Mechel is already selling steel stockpiles controlled by the trading operation, which have fallen to 386,000 metric tons from 500,000 tons at the start of the year.
U.S. coal unit Bluestone Coal also may be sold or combined with another North American producer, the CFO said. Mechel has hired JPMorgan to advise on its options for the business.