Research Notes

The campaign kicked off on April 9 to accept bids to purchase shares of Magnitogorsk Iron & Steel Works (the order book will be closed on April 23) as part of its IPO. We are of the opinion that this offering will raise substantial interest of investors who, all other things being equal, could be attracted by the adequate IPO price. According to our estimates, the fair value of MMK is $11,162 mln or $1.05 per share, as a result of which we advise investors to pick up the metal giant's shares in the IPO at a price not higher than $1.05.

In line with the IPO memorandum, Mintha Holding, MMK's shareholder which is owned by Victor Rashnikov, could offer investors 2,864,364,858 shares which account for 26.95% of the company's current charter capital. At the same time, investors could see a block of additionally issued shares, provided that it is not bought back by the current shareholders which currently hold the right of first refusal. However, as the selling shareholder intends to spend IPO proceeds to buy back the additional shares, investors could gain on the aggregate some 10-15% of MMK's increased charter capital.

At present, almost 100% of MMK is controlled by the company's management and board members. MMK's largest beneficiary is board chairman Victor Rashnikov.

MMK's IPO will be a positive, improving its stock liquidity and enhancing its corporate transparency. Furthermore, the metal maker will obtain the fair market value of its assets (since at present its free float is minimal (1-3%) and it is quite difficult to determine the company's actual market value). In terms of market conditions, 2007 is expected to be fairly successful for steel makers, which could help raise investor interest in MMK stocks.

MMK released strong 2006 financials, boosted production volumes, targets the fast growing domestic market and that of higher value-added products. In addition, the metal producer signed long-term feedstock delivery contracts, which attenuates the risks associated with its poorly developed raw material base.

The bookbuilding range for MMK stocks to be offered in an IPO will be $0.9423 to $1.1923 per share. The price band per Global Depositary Receipt (GDR) will be $12.25 to $15.50 (GDR is equal to 13 shares). According to our calculations, the fair value of MMK equities is $1.05. Thus, we believe that the optimal price range for purchase orders is $0.9423-$1.05.

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Nataly Kocheshkova

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