Mechel owner and general director Igor Zyuzin may shortly approve an IPO for the company’s mining assets, the Kommersant daily reported. In the scheme approved, Mechel will not convert its assets to a single share. Not will it convert or buy out minority shareholdings in its subsidiaries. Instead, Mechel is likely to establish a new company named Mechel Mining, which should inherit its share packages in Southern Kuzbass (at 93.07%, RTS:UKUZ), Yakutugol (100%), Elgaugol (71%) and, possibly, Korshunovsky GOK (85.06%), which mines iron ore. Kommersant states that Mechel aims to raise USD 4 bn by placing 20% in Mechel Mining, valued at USD 20 bn. The figure exceeds the market capitalization of Mechel, which was quoted on the NYCE at USD 13 bn yesterday.
The plans to hold an IPO for Mechel mining assets became known long ago, while a scheme for holding the IPO, as well as a trade floor for the public offering, are yet to be specified. In our opinion, the company overestimates the assets, even allowing for current favorable market conditions. As regards the IPO scheme, we regard it as rational, but for it to be workable; Mechel will probably have to consolidate 100% in Southern Kuzbass, Elgaugol and Korshunovsky GOK. Given that Mechel values Mechel Mining so highly (at USD 20 bn), the price of the assets to be consolidated should be as high, implying Southern Kuzbass and Kurshunovsky GOK may be assessed at a premium to their current market value (as part of the possible buyout).
Given the average financial indices in the industry, Southern Kuzbass shares may now be priced at USD 161 per share, up 115%. Korshunovsky GOK shares have a 43% upside potential. We estimate the fair value of its shares at USD 3,550 per share.
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