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"Risk comes from not knowing what you're doing" Warren Buffett I look and sift the world for such misplaced bets. When I occasionally find one, I first exploit it for profit. Then, I write about it for anyone else interested in such ideas. Twitter: @unemon1 Scribd:... More
  • A Simple - Almost Risk Free - Long Term Play - Arbitrage Opportunity On MECHEL  6 comments
    Apr 4, 2014 10:46 AM | about stocks: MTL, MTLPR

    Mechel is involved in four business segments which include mining, steel, ferroalloy and power. The Company unites producers of coal, iron ore concentrate, nickel, steel, ferrochrome, ferrosilicon, rolled products, hardware, heat and electric power.

    Stocks of the Company (Mechel OAO) are traded in the U.S. under the Symbol MTL and in Russia under the Symbol MTLR.

    MTLR is currently trading at 39.10 RUB on the MICEX --> = 1.11 USD/Share

    MTL is currently trading at 2.01 USD/Share in the U.S.

    U.S. traded Shares of Mechel are Trading at a premium of approximately 81.08%.

    The premium is not caused by a lower liquidity on the Russian Market. In fact, MTLR volume over the past 30 days has bee 5.53m shares as opposed to a MTL average volume of only 1.932m shares.

    One was to profit, would be to short MTL and buy MTRL. However, this is not my favorite play here! If you want to play the possible Coal recovery story without incurring substantial risk, I would go for the following play:

    1. Long MTLR

    2. Long Puts on MTL with a Price Strike of USD 2 and a January 2016 expiration date.

    You pay USD 1.11 to go long MTLR ... + ... USD 0.80 to go long the PUT ------> Total Cost = USD 1.91

    This strategy costs less than directly buying MTL .... and offers you a 100% capital protections (+ a 5% gain) ... in the case Mechel were to go Bankrupt before 2016.

    Only risks you would still be exposed are... FX ... and ... the scenario under which Prices of MTL commons were not to converge

    Disclosure: I am long MTL.

    Additional disclosure: MTL, MTLR, Puts

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Comments (6)
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  • Wilson Wang
    , contributor
    Comments (818) | Send Message
     
    Wow... Good play. Thanks
    4 Apr, 11:19 AM Reply Like
  • Harlan Kessler
    , contributor
    Comments (56) | Send Message
     
    What are your thoughts on the Mechel preferred shares? MTLRP trades on the Micex at 54.44 rubles = $1.52. MTL-P, the shares traded on the NYSE, = 1/2 a preferred share so they should be valued at $0.76 however they trade at $0.315. Seems to be the exact opposite as you discuss above, the US shares are trading below fair value. Any thoughts?
    2 May, 09:29 PM Reply Like
  • UNEMON1
    , contributor
    Comments (226) | Send Message
     
    Author’s reply » There is a total of 138.75m preferred ... of which 25.17m are currently trading in form of ADSs in the U.S. (As per Mar 2013). Each preferred ADS represents one-half (0.50) of a Preferred share.

     

    MTL/P (U.S. ADSs) is currently trading at $0.3155 ... implying a Value of $0.631 for each Preferred Share.

     

    Preferred in Russia: MTLRP (traded on Micex Main: MTLRP RX) ... the current price is RUB 26.26, namely $0.73 per Preferred

     

    Preferred in the U.S. are therefore "only" 13.56% cheaper than Preferred in Russia.

     

    The problem with MTL/P ... is the complete lack of liquidity in the security. Average daily volume over the past 15 days has been approx. 35k shares. Volume in Preferred listed on MICEX is about 3x higher at (92k shares).
    The differenece in liquidity could help you explain the price difference observed on the 2 exchanges.

     

    Not sure where you are getting the price of 54.44RUB for Preferred!? ... Where did you get it?
    3 May, 07:36 AM Reply Like
  • Harlan Kessler
    , contributor
    Comments (56) | Send Message
     
    I pulled the quote from google finance. Mcx:mtlrp - $54.44
    3 May, 05:17 PM Reply Like
  • UNEMON1
    , contributor
    Comments (226) | Send Message
     
    Author’s reply » Not sure, but I think something is wrong with GOOGLE. Here is the link to the MICEX Website:

     

    http://bit.ly/1iLBgqL
    3 May, 06:03 PM Reply Like
  • Harlan Kessler
    , contributor
    Comments (56) | Send Message
     
    Great. Thanks for your clarification
    5 May, 08:52 AM Reply Like
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