Mechel Trouble Spells Buying Opportunity for Gazprom

Last Thursday, shares in Russian coal mining and steel company Mechel (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 (OGZPY.PK) 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

Comments

[Randy Kirk:]

Good article -- Gazprom is still absolutely in favor by the Russian government, as the former Chairman of Gazprom, Dmitry Medvedev, is now president of Russia! Also note, it is very likely that Gazprom will report significantly higher income through 2011, due to the fact that Russia is raising domestic gas prices by over 20% per year, in order to bring Russian natural gas prices to international levels by 2011 (right now Gazprom earns the majority of its net income from International (non-Russian) sales). Reference: www.redorbit.com/news/.../

""Domestic prices are currently state-regulated and, accordingly, lag prices abroad. The domestic price is barely 20% the price abroad. But that difference will diminish steadily. The government has approved an increase of about 25% a year, but with the understanding that netback parity will be achieved from January 1, 2011," he said."

The main concern with investment into Gazprom is the achievability of its next generation of natural gas supply, mainly Gazprom's projects on the Yamal Peninsula. These are likely to be expensive and technically difficult although there is little doubt that, geologically, massive reserves exist in the gas fields of Yamal.

2008 Jul 31 05:06 PM

[Objectivity:]

"Hostile takeover" ... ???

What are you smokin', J-Cris?

Mechel was engaged in tax evasion by using transfer pricing!

Putin simply told Mechel that the Feds were on to the scheme, and the head of Mechel chickened out of a planned meeting to address the end effect of such business tactic! Now you mischaracterize Putin's response???

Can't any of you just ONCE tell the truth about Russia?

It's about ENFORCING THE LAWS!

It's about Justice...

'Sic Semper Tyrannis'

This is what the righteous Russian government is doing to those who steal huge from the people. Justice.

Sic semper tyrannis... in the USA it was an expression of righteous justice, well executed. So now, when the "Russians" defend their country from thieving oligarchic tyrants, only an imbecile or a paid stooge would object here in the west...

Sic all right... Sick of all the propaganda against those who defend their country from thieves and criminals.

2008 Aug 01 08:08 PM

[Steven Ward:]

Ah yes, a return to the Czars and the Boyer Classes with the enevitable 21 st Century technology and government structure.

Please the Czar and you get the momopoly in a certain business, displease the Czar and you are out of business. no matter the substance of your reward or the proof of your crimes, just please the Czar and join the Boyer Classes of 21 Century Russia.
The more things change the more they stay the same.

2008 Aug 16 03:05 PM