MTL Spinoff news and GS assesment.

News
Russian news agency, Interfax, reports that Mechel is considering a plan to
segregate its mining business and conduct an IPO of this new company on the
TSX potentially raising up to $2 bn. According to the article, the new
company could sell up to one-third of its stake.

Analysis
The company has historically been under pressure from the market to unlock
its conglomerate structure, which unites steel and mining assets (coal, iron
ore and nickel). Such a move, were it to be confirmed by the company, should
release the pure-play value of these assets, which we believe is higher than
the current value of the conglomerate, as well as help raise funds for the

development of existing and recently purchased coal assets. That said, the
valuation mentioned (implied equity value of newco of $6.7 bn) does not make
a lot of sense to us as, on our estimates, it implies a 2008 EBITDA multiple
of around 5.2x (based on our 2008 mining segment EBITDA estimate of $1.66 bn
and assuming debt of $2.0 bn), which is lower than Mechel’s current
‘conglomerate’ multiple of 5.3x.

Implications
We believe such an event would be positive for the stock. While where the
upside is coming from should be reasonably clear, we would also voice two
concerns, namely: (1) to what extent management of two separate entities
would be as smooth as that of the current conglomerate given the scarcity of
management resources; (2) to what extent investors might be willing to switch
from the parent conglomerate into the standalone mining business when (and
if) the deal takes place. We reiterate Mechel as our key idea in the Russian
mining and steel space (as well a Russian Focus List idea) with a 12-month
SOTP price target of $112. Risks to our price target include the performance
of Mechel’s steel assets, labor cost inflation, iron ore and coal prices. The
level of demand for coal in Russia and consolidation risks for recently
acquired assets are additional risks.

Advertisement