Iron ore prices are rising in line with all metal commodities. As a result, Russia’s raw material and metal producers are striving to enter foreign markets where prices are higher. Domestic producers are understandably interested in exercising control over “raw material” assets in order to keep ore supplies at “their own” prices. In view of this, mining and processing integrated works (MPIWs) have long found ways and means to solve the supply issue. Companies without their own raw material reserves are forced to pay a lot for MPIWs to their current owners or tap new fields. In our opinion, the investment appeal of MPIWs is destined to grow, since global metal trends are looking bullish in the short and mid-term outlook.
The average rise in metal commodities is expected to be 30-40% in 1Q 2004. According to our forecast, prices will continue to go up in 2004, albeit at a slower pace compared to last year. Concurrently, raw material prices have surged and both raw material and metal producers are striving to enter foreign markets, first and foremost in Central and Eastern Europe and Ukraine where prices are higher (+30%). This way, purchasing ore in Australia and Brazil becomes as profitable as domestic supplies, although such channels sometimes fail, as foreign vendors prefer the growing Chinese market. This was the case with Kosogorsky MPIW, which was forced to switch from its Australian vendor -- which preferred to export ore to China -- to a Kazakh supplier.
The domestic iron ore market is valued at about $85 mln, and roughly 10% is imported from Kazakhstan. Back in the Soviet era, integrated iron and steel works (e.g. in the Urals and Western Siberia) were initially built with a view to fields in Kazakhstan. Russia, in turn, exports up to 14 mln tons of ore.
Domestic producers are understandably interested in exercising control over “raw material” assets in order to keep ore supplies at “their own” prices. This claim is borne out by the fact that major MPIWs have been bought up long ago (see table below).
| Company | Market share | Owner |
| Lebedinsky MPIW |
21.3 |
Gazprominvestholding |
| Mikhailovsky MPIW |
18.3 |
Metalloinvest |
| Stoylensky MPIW |
13.4 |
NLMK |
| Olenegorsky MPIW |
4 |
Severstal |
| Kovdorsky MPIW |
4 |
MDM |
| Karelsky Okatysh (Karelian Pellet) |
12 |
Severstal |
| Kancharsky MPIW |
15 |
Eurazholding |
| Korshunovsky MPIW |
2 |
Mechel |
Severstal, which controls Karelsky Okatysh and Olenegorsky MPIW and buys minor quantities of raw materials elsewhere, is better stocked with raw material reserves. Other metal producers possess smaller raw material stocks. MMK purchases ore from Sokolovsko-Sarbaisky MPIW in Kazakhstan. Eurazholding failed to take over Korshunovsky MPIW last year and now intends to invest $60 mln in new fields in the Kemerovo and Krasnoyarsk regions. NLMK, which long had no mining base, is finally able to meet demand. The company acquired the controlling stake in Stoylensky MPIW for 15.5% of its own equity around the end of last year.
The investment appeal of MPIWs is destined to grow since we are looking for global metal trends to be bullish in the short-term and mid-term outlook. We assume both Mikhailovsky and Stoylensky mining and processing integrated works could have a new owner.
As for stock market options, only two facilities, Mikhailovsky and Stoylensky mining and-processing integrated works, are listed for trading. In line with our estimates, their upside potential is 50% at current prices. It is also noteworthy that the free float of these shares is low, and the risk still exists that minority shareholders’ rights could be violated.
Nataly Kocheshkova
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Sector: Metals, Ore Enrichment Plants
Companies: Karelski Okatysh, Lebedinsky GOK, Mihailovsky GOK
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