Russians Come in From Cold as Trump, Commodity Markets Align

Updated on
  • Rusal said to plan sale of up to 20% stake to global investors
  • ‘Investors see less risk in Russian companies now:’ Rusal

As Donald Trump edges the U.S. closer to a thaw in relations with Vladimir Putin’s Russia, commodity investors are already jumping in.

A plan by United Co. Rusal, the biggest Russian aluminum maker, for a London sale of shares valued at about $1.7 billion is the latest sign that Russia’s exile from world markets is over for the nation’s metal and mining giants.

It’s a turnaround from years in which slumping raw-materials prices, a weak economy and sanctions imposed by then-U.S. President Barack Obama over the annexation of Crimea punished valuations and drove away foreign investors.

Share sales by Russian mining companies have been rare since 2010. Until two months ago, PhosAgro PJSC’s offering in April 2013 was the last major sale by a non-state Russian mining company. The fertilizer miner and processor is among those that have returned since December.

Offerings from Novolipetsk Steel PJSC and TMK PJSC bring the total raised by mining and metals producers since then to about $575 million. Others weighing offers include En+ Group Ltd. and Polyus PJSC.

MMK, Onexim

Magnitogorsk Iron & Steel OJSC, also known as MMK, is also considering selling a small stake to the market, people familiar said on Friday.

Billionaire Mikhail Prokhorov’s Onexim Holdings Ltd. may offer up to 5 percent of Rusal to investors soon, people said late Thursday. En+, Polyus, MMK and Onexim declined to comment when contacted by Bloomberg.

It’s not just plain equities. In a sign of investor appetite, steelmaker Severstal PJSC sold $250 million of convertible bonds on Thursday paying a zero coupon.

"Investors see less risk in Russian companies now as the geopolitical situation has eased,” Rusal Deputy Chief Executive Officer Oleg Mukhamedshin said in an interview in Moscow last week following a company sale of eurobonds. “That affects demand for both bonds and equities.”

Trump’s election as U.S. president helps. The admirer of Putin is willing to consider lifting sanctions, according to an adviser. That would ease investment curbs and signal less political risk for foreign holders of Russian securities.

Metals Bounce

More immediate is a recovery in global commodities after a five-year slide. A gauge of prices has gained more than a third from its lows. Crude oil, key for energy-rich Russia, has doubled since early last year after two years of losses. Natural resources will extend gains in the first half, UBS Group AG says.

That’s a boon for an economy set to grow 1.1 percent this year and 1.5 percent next after contracting in 2016, a Bloomberg survey of 39 economists shows.

It’s also stoking foreign demand for local securities.

Rusal’s proposed sale of global depository receipts would represent up to a fifth of the company, according to two people with knowledge of the matter, who asked not to be identified as a final decision hasn’t been made. The plans are still preliminary and haven’t been submitted to the board, which would need to approve the decision.

The board hasn’t discussed an offering, according to a statement Friday to the Hong Kong stock exchange, where the company is listed.

Investors from the U.S., Europe, Asia and the Middle East bid for all the shares on offer from PhosAgro within an hour of the opening of the sale, said Boris Kvasov, director of equity capital markets at arranger VTB Bank.

Growth Returns

"Metals and mining is one of the sectors that has performed strongly and continues to benefit from the return to growth," Alex Metherell, co-head of global banking at VTB Capital, said by e-mail. We see “investor demand and a matching degree of supply from companies keen to engage.”

Some companies in the industry may also attract attention as they’ve become cheaper relative to global peers during Russia’s years out in the cold.

Severstal and Novolipetsk Steel, known as NLMK, were at a combined 19 percent discount to foreign rivals, based on their enterprise value to earnings before interest, taxes, depreciation and amortization, a Citigroup Inc. report said on Feb. 1. In contrast, the discount for major oil producers was just 2 percent.

At the same time, costs are lower for companies producing in Russia and exporting abroad after the ruble fell by half in the past five years.

NLMK has one of the lowest costs of steel output in the world. That helped it achieve an Ebitda margin of 30 percent in the third quarter, its highest level of profitability in six years, compared with an average of about 11 percent for the global industry, according to data compiled by Bloomberg.

Even with the European Union planning to renew asset freezes and travel bans against key allies of Putin, in contrast with Trump’s overtures to the Russian president, investors’ appetite will probably hold up in the short term.

“There is a big window of opportunities for Russian companies,” Kirill Chuyko, an equity strategist at BCS Global Markets, Moscow’s largest brokerage, said by phone. “Rusal and others are in a rush to take the hot money as the window may close soon if geopolitical tensions come back."

— With assistance by Ksenia Galouchko

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