Mechel ADRs Rally as Bankruptcy Concern Fades: Russia Overnight

OAO Mechel posted the longest streak of gains since 2013 after it reduced debt and speculation mounted that Russian state-controlled lenders are moving to take over the mining company as it seeks to avert bankruptcy.

The American depositary receipts jumped 6.1 percent to $1.75 on Thursday, pushing the seven-day advance to 41 percent. Russia’s biggest producer of coal used to make steel lost almost three-fourths of its market value last year as it lost money in each quarter amid plunging prices for the raw material.

The company, which owes about $7 billion, cut liabilities by $140 million this week as part of a deal to sell U.S. assets, according to a Feb. 18 regulatory filing. State-run OAO Gazprombank, one of its lenders, in October bought personal debt of Chairman Igor Zyuzin that was backed by 15 percent of Mechel’s stock, Vedomosti said Thursday, citing sources it did not name. The newspaper report stoked speculation that the government may be planning a takeover, which Zyuzin has opposed.

“Investors take this as a sign that the state-controlled banks are sticking to a strategy of gaining control over the company and changing management,” Pavel Vasiliadi, the director of research and risk management at UFS Finance Investment Co., said by phone from Moscow Thursday. “The company is going to survive one way or another. Mechel is gradually cutting debt, and it’s on the list of strategically important enterprises that the government won’t let fail amid the crisis.”

Gazprombank, OAO Sberbank and OAO VTB, all of which are government controlled, own most of Mechel’s debt. Arseniy Palagin, a Mechel spokesman, declined to comment on the Vedomosti report when contacted by phone.

Stock Rally

Mechel has more than doubled since January in the best performance among Russian ADRs. The company, which employs about 70,000 people, is included in a list of about 200 “systemically important” enterprises that Russia said it may support under a government plan to stabilize the economy.

The Bloomberg Russia-US Index of the most-traded stocks added 0.1 percent to 61.73. The Market Vectors Russia ETF lost 1.2 percent, the most in two weeks. Futures of the dollar-denominated RTS Index added 1.4 percent to 91,690 in U.S. hours.

Mechel, which makes more than half of its sales domestically, has been losing money since 2012, data compiled by Bloomberg show. Analysts estimate the company lost $385 million last year after reporting a record loss in 2013. The company in December reported a third-quarter net loss of $575 million, more than four times wider than the same period a year earlier, as coal prices dropped 25 percent.

‘Half Dead’

“Mechel is half dead already,” Kirill Chuyko, head of equity research at BCS Financial Group who rates the shares sell, said by phone from Moscow Thursday. “Buying the stock is like gambling in a casino. Yes, it may triple from here. And yes, it may shrink threefold from the current level. The risk is unbelievably high.”

The Moscow-based company suspended debt payments last year as coal prices slid. Mechel has come under pressure by lenders as well as Prime Minister Dmitry Medvedev, who have demanded that the company make a decision on a plan that will enable it to pay its debts. While several restructuring proposals have been discussed, including the sale of convertible bonds, Mechel is still trying to find a way to meet its obligations and avoid bankruptcy.

Weaker Ruble

International sanctions linked to the Ukraine conflict combined with a plunge in oil prices have pushed Russia, the world’s largest energy exporter, toward its first recession since 2009. Gross domestic product will probably contract 4 percent this year, according to the median estimate of 34 economists surveyed by Bloomberg. The ruble has weakened 25 percent in the past three months, the worst performance among emerging-market currencies.

The weaker currency, which plunged 46 percent in 2014, helped shave about $2 billion from Mechel’s total debt, according to a presentation posted on its website. The company said in December that it had agreed with Gazprombank on a “compromise” debt restructuring and submitted a draft of the proposal to VTB and Sberbank. Sberbank Vice President Maxim Degtyarev said the lender is ready to discuss “terms of comprehensive restructuring,” Interfax reported Thursday.

“Investors are speculating that there’s going to be a solution to Mechel’s debt problem one way or another,” Sergey Donskoy, an analyst at Societe Generale SA in Moscow, said by phone Thursday. “Mechel and other exporters also benefit from the weaker ruble. As the currency falls, its ruble-denominated revenue rises.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE