Mechel Group (RTS: MTLR) was reported on November 30 to be considering an IPO for its mining division, which is to be spun off into a standalone company, on the Toronto Stock Exchange.
Up to two thirds of the spun-off company, in which South Kuzbass, Yakutugol and Elgaugol will be included, could be offered to investors. However, it is still too soon to discuss the amount of shares to be offered or the proceeds. As a rule, companies float a stake below a blocking interest. This means that if Mechel opts to place shares of its coal assets, the company will retain control over them.
The company's spokespersons said there are no decisions or precise plans as yet. The offering is one of the options that the company is reviewing and it could take place in 2008 or in 2009-2010. The Toronto Stock Exchange was selected because it is traditionally a good trading floor for mining stocks.
We have repeatedly noted that the company could go public. Therefore, this decision came as no surprise to us. Mechel has invested significant amounts to pick up Yakutugol and Elagugol. In addition, another $1 bln is to be shelled out to develop the Elginskoye field. For this reason, coal asset consolidation by Mechel (supposedly on the basis of South Kuzbass) and their subsequent IPO come in line with expectations.
In our opinion, this news should positively impact the market valuations of both Mechel (raising additional proceeds will make it possible to reduce the company's debt burden) and South Kuzbass as a possible coal asset consolidation hub.
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