Mechel Trouble Spells Buying Opportunity for Gazprom

Includes: MTL, OGZPY, RSX
by: J. Christoph Amberger

Last Thursday, shares in Russian coal mining and steel company Mechel (NYSE:MTL) crashed almost 38 percent, after Prime Minister Vladimir Putin complained the company was charging higher domestic prices than they were charging foreign customers.

Yesterday, he picked up where he left off, accusing the company of tax evasion… a charge worth another 26% drop.

Mechel OAO’s ADR (MTL), which had closed at $36.61 last Wednesday, dropped $13.77 on Thursday to close at $22.84, after Putin spoke. The company responded on Friday, signaling complete submission, good for a 14.71% pop to a close of $26.20. Yesterday, Putin renewed his attacks, slashing the stock price down to $19.72.

The Moscow stockmarket had fallen more than 5 percent Friday, as investors bran for the hills in anticipation of another attack on a company similar to the destruction of Yukos back in 2004.

Mechel had already rolled over on Friday, pledging to co-operate with federal authorities of the Russian Federation. Not enough: Today, Putin accused the company of selling coking coal to foreign affiliates, to re-sell it at much higher prices. He indicated that he considers this pricing policy is aimed at evading taxes.

These public denunciations look like the opening salvos in a concerted effort to lower company value before adding select parts of its corporate carcass to other, Putin-controlled companies. At $19.47 per ADR, the money at risk Mechel may just be… $19.47 a share.

As Mechel dipped, however, the Kremlin’s corporate alter ego, Gazprom, shed much of its valuation as well. Gazprom OAO (OTCPK:OGZPY) dripped 21% from a high of $58 to close at $45.55 last Friday. Mechel’s drop today has not yet been reflected in the ADR’s real-time pricing on Yahoo and Google.

This happened despite Gazprom signing a deal to gain access to the Spanish liquid natural gas market.

We consider Gazprom a cornerstone of any strategic portfolio. Current disturbances in the Moscow market could push the price below $40. As the undisputed hammer and sickle of Russian foreign policy, this company (which maintains its own well-equipped private army), there is no reason to expect it from ever falling from Putin’s grace. Or profitability.

We suggest piggybacking on Putin’s hostile take-over of Mechel by stocking up on Gazprom on the cheap, before the company’s 1st half 2008 earnings release in September 2008.

Disclosure: none