Your right about the infrastructure - if I recall, MTL invested around $1.5 billion or more just to build the railway from Ulak up to the Elga deposit. As this region expands with new population and businesses, it would make sense for the Russian Railway to buy this from MTL. This would immediately let MTL wipe off $1.5 billion in debt. Cash flow wise it may be a wash since they'd have to pay RZD the freight fees but, considering the maintenance costs on a line through this type of terrain, it may actually be cash flow positive in the long run. MTL could even guarantee minimum freight fees adequate to service the debt on $1.5 billion for a period of five years or so and it would still be a good deal since MTL is paying the interest on the debt anyway. Can you imagine the pop we'd see if a deal like this could be announced and MTL's debt suddenly was decreased by $1.5 billion?
High risk, high reward. Could go to zero or be back to $30 in another 3 years. I still like the Preferred shares over the common due to valuation and higher dividends. Go for it, just don't invest more than you can afford to lose!! This is like having to put in another $100 to call on your last round of a poker hand with $10,000 in the pot. So what if you lose it all give the odds.
I love stocks like MTL!! A good company with tangible products makes a couple bad bets that almost takes it down, a year or two of near bankruptcy and then whamo - the problems go away and make a killing. For those of you who have losses on this, you can do one of two things - hang in there and hope for the market to turn or sell and reinvest in something else. Question you have to ask is what is the upside of what you are buying compared to the upside in MTL. My parallel for those who are thinking about bailing is just take a look at the price history back to 2006 in a company called Gruma (ticker GMK). A tortilla company that was rapidly expanding worldwide was trading in the mid teens in 2006/2007, then made a really bad currency hedging bet that cost them almost a billion dollars and the resulting debt (they had to borrow funds to pay off the hedging losses) had them on the verge of bankruptcy for a couple of years. The stock collapsed and I bought a shitload of shares at around $2.20 in mid-2008. In 2009, it was down to $1.27 and I was having the same thoughts as a lot of today's MTL posters. Luckily, I trusted my instinct and looked at the fundamentals behind the company (today there's hardly a grocery store in the world where you can't find their products and the have a lock on supplying much of the fast food industry). Today the stock is around $32 - unimaginable four years ago when it looked like the company would not make it. MTL is undergoing some of the same issues GMK had in 2008/2009. I'm not saying this won't be a different story but to me, the risk reward makes it a no-brainer to hang in there. All we need to do is scrape by for another two years until they get the Elga production ramped up, with a little luck coal and steel prices will recover somewhat and you'll conservatively have $25 common and $10 preferred ADR prices.
True, but just think about how far they have to go up!!! I'd rather take my chances on a developing economy than those that have already matured and reached their peak. I'm still sticking with MTL. Russia's near-to-mid term economy is all about oil and gas. As long as oil and gas prices hold, which they seem to be, Russia will do just fine. Virtually no debt, near a balanced budget, low taxes, high foreign exchange reserves per capita, and more natural resources than any country in the world. Not is all bad if you look at the underlying fundamentals. Patience could be very well rewarded if you have the stomach to ride out the rough patches. Just look at China 20 years ago and China today. No one would have imagined they could have become the manufacturing king of the world.
Let's say there's a 50/50 chance this goes belly up in the next two years. If so, you've lost 40 cents at today's price. However, if it makes it and even gets back to 2011 profit levels (personally I believe if they make it into 2017, their profit will far exceed any past earnings with the added output from Elga staring to kick in in 2017. Just remember, the 2012 dividends on the ADR Pref. was 52 cents so let's say this is a worst case in 2017 and beyond. If you start getting 52 cents annual dividends on a 40 cent investment, the risk reward is much better than anything I have found in today's market. Don't forget, they've gotten rid of the big loss making subsidiaries which was a big drag on earnings. Without losses from these operations, the 2012 dividend would have been much higher. If we make it, this will pop big time so you have to look at the odds - just like in poker, the bigger the pot the more you want to stay in even if you have a certain probability of losing the hand.
Yes, and on top of that, they also just saved themselves $12 billion from the remaining bailout funds and will soon be raising the price of gas back to pre-negotiated rates.
No way anyone will see dividend this year except the preferred shares will get their $0.00001 (or something like that) dividend per share like last year to keep from triggering their voting rights. No way the creditors will allow dividends on the common at this point. Maybe in 2015 at the earliest and then I wouldn't hold my breath except on the preferred shares which get 20% of net income. I like the stock but any meaningful dividends on the common are at least 3-4 years out absent some unexpected event.
MTL is more of a play on steel than energy since Elga is primarily a Met Coal deposit. Thermal coal prices will track natural gas but this correlation doesn't necessarily work for met. coal which correlates more with world steel demand.
At the government level, America and the "developed" countries cannot build anything new because they are broke and spend all their revenue on interest on their debt, social payments for food, housing, and health, defense and still need to borrow 50% more than they take in just to do that. Nothing left for major infrastructure investments or repairs. At the private level, corporations don't want to expand because they see that the economy (dragged down by government policy and regulation) cannot support additional investment with high unemployment and the continued decline in middle class consumer spending. The emerging markets (particularly Russia) on the other hand have managed to keep their debts relatively low (I think Russia's debt/GDP is around 12 percent while the U.S. is well over 100% (at least 300-400% if you include the "off balance sheet" liabilities for Social Security, Medicare and Federal pensions) and have a fast growing middle class that will support internal economic growth for years to come.
Let me guess, you are probably in your 20's or 30's? Am I right? Impatience is a usual sign of youth and lack of experience. If you got in at $2.60, you really haven't held it that long and you already expected it to "shoot high like 2008/2009? My advise is to just slow down and take a much longer investment view and quit thinking you are some stock wizard that can time the bottoms and tops. Those with patience and faith in their analysis will be the ones that make a killing while the traders will be happy to walk away with a 20% gain, only to turn around and lose 15% on their next trade. Just go back and study the stock charts of any number of companies that have taken off. and you'll see they may have languished in a tight range for years before producing 1000% or higher returns. Take Amazon for example, a very good company with a solid business model. If you got into this between 2003 and 2005, for $40, it was still sitting at $40 two to four years later in 2007. Today, you'd have a $400 stock if you believed in the company. There are hundreds of these examples but you'd never get this type of return taking a short term view, maybe being happy with a 25% return as soon as it hit $50 or selling at breakeven when you got impatient after holding it a couple of years. You can't time these things, they just have to mature at their own pace. If you think MTL will shoot to the highs of 2008, do you really care if it takes five or six years to get there? Look at it this way, you've got $52,000 tied up in those 20,000 shares you own. If you sell today and put the money into other investments and earn a 20% return (not bad, right?) over the next five years, you'll have accumulated approx. $130,000 (much less if you trade in and out and have to pay the cap gain tax on your interim profits). If MTL were to get back to only one-half of it's 2008 high of $57 or it's 2011 high of $33, you'd have between $470,000 and $660,000. This is what patience can do.
I can't see much happening in this short time frame to boost the share price - more like 2 to 3 years, not months before we see a "major" uptrend. MTL is all about coal and steel and, abssent a "major" upturn in the world economy, their recent/current capital investments (Elga and Chelyabinsk) are not likely to see big payoffs until 2016 or 2017. If I recall, the current Elga expansion project which will significantly boost production output is not scheduled to be completed until 2017. Although most of the investment in Chelyabinsk is already completed, I don't think they have any major orders coming in the short term. The big hope on the steel side is that they'll get some major rail orders from RZD and other infrastructure/military orders but it seems most of the major rail expansion projects are not likely to start for another 12-24 months from what I've been reading. Without three or four quarters of consistent positive earnings, this is not likely have a "major" upside move - keeping in mind my definition of "major" is much more than a $1 or $2 move. I suppose for a lot of traders, a 50 cent move would be considered major but I'm a buy and hold guy who doesn't trust his ability to time the maket. My definition of major would be for the common to get back in the $8-$10 range which I don't see happening for at least two more years.
Hey, in a liquidation scenario the preferred's won't get a penny (or ruble depending on whether you hold the ADR's or regular shares!!) since the assets are not likely to sell in liquidation for their current book value. Even the creditors will more than likely to take a haircut on their debt - which is why they agree to the ongoing debt restructurings. The only thing is relevant in determining the company's value is the anticipated future earnings and cash flow to service debt. This of course is highly subjective depending on your views of the future for the world economy, Russian economy, coal prices, steel prices, future production from Elga, future steel orders from the new Chelyabinsk factory, etc. If you think the company is more likely to be liquidated, then walk, or better run away, from this one. I for one like the risk/reward on MTL so am still hanging in there and still adding.
That sounds about right after this year's write-offs and losses. I "ball parked" it a little higher at between $2.30 and $2.40 but this was a very rough estimate so the $2.17 may be more precise, not that "book value" on a company like this has any meaning. It's all about cash flow and earnings so you won't find many investors who even look at "book" as any reasonable valuation tool.
I believe part of the reason for the discount to the Russian preferred shares is the ADR fees (this year they were 3 cents per share or almost 7% of the current price; compared to 1 cent last year). Also, there's a liquidity risk if the Pref. ADR's are delisted - more likely than the common due to the volume traded. Aside from the discount of the pref ADRs to the regular ADR's (which I understand), what I don't understand is the huge discount of the Pref. to the common - almost 50% on the Russian exchange and 65% on the NYSE (adjusted for the 2/1 ratio). This doesn't make sense on either exchange if you look at the terms of the preferred shares.
In my humble option, the Preferreds are a much much better deal than the common. Preferreds get an automatic 20% of net income while the common may get little or no dividends for a long long time as cash is needed to pay down debt. The common dividend in 2012 was about 26 cents if I recall correctly (about a 10% yield based on today's price) while the preferred dividend on the ADRs was 52 cents, a 124% yield based on today's price. The debt holders can demand dividend restrictions on the common while it's not so clear they can do so on the preferred since the dividend is required as part of the terms of the offering documents. Lets assume MTL turns a profit of $500 million in 2014 (not likely - just for illustration). Preferred holders will get a dividend of $100 million and the common will get nothing unless approved by the creditors. In an optimistic scenario, lets assume MTL really turns the corner and pays an unusually large dividend to the common shareholders. In this case, the Preferred holders will get the same dividend as the common since the terms of the offering provide that the dividend to the preferred cannot be less than the dividend to the common. These are the kickers that have me scratching my head as to why the preferred would ever sell at a discount to the common. Granted, the preferred is somewhat more illiquid due to the smaller number of shares traded but two key terms (guaranteed 20% of income and floor on the pref. dividend set at the dividend on the common) would seem to more than offset the liquidity issue.
Prices actually don't have to increase all that much for them to turn this around, particularly with the added volume coming from Elga. Don't forget they are getting rid of their loss making operations which have been a big drag on earnings for the last several years. I went back to 2005 and (excluding 2012 and 2013) MTL has generated the following net income each year even with the negative income from some of the dogs they just got rid of: 2005 $381 million; 2006 $603 million; 2007 $913 million; 2008 $1.1 billion; 2009 $73 million; 2010 $657 million; and 2011 $728 million. The average of these 7 years was $636 million ($1.52 per common share) without any Elga production and without any increase in income from the new steel plant in Chelyabinsk which should be getting some pretty big orders from the national railway and other infrastructure projects. Yes, they will have added interest expense from the new debt but Elga production should more than cover this within the next couple of years. Of course if we have another global slowdown and coal prices deteriorate further, this is likely dead money. However, all signs are for marginal improvement in 2014 and beyond with the central banks in the US, Europe and Japan keeping their foot on the gas. From where I sit, there are a lot more positives than negatives which makes the risk/reward on this one look pretty good.
A look at prices for Nat.Gas, WTI and Brent crude all show bullish patters with Nat Gas holding firm above $4.25, Brent just broke through $112 and WTI just broke through $100. This is all good for the Russian economy and will allow them to follow through on major infrastructure spending over the next several years which will benefit coal and steel.
This has to be the best value in the entire market. Share price $0.45 vs dividend paid in 2012 of $0.52. Granted, dividends will likely be zero or minimal for the next year or two but once the Elga income stream comes on line and they start selling some of the high value steel from the new plant, this baby should skyrocket. Granted, there's a chance we can go to zero and lose it all but the risk/reward on the MTL-Preferreds is a once in a lifetime opportunity. Even if it only gets back to half of its previous high of $11, that would be $5.50 per ADR pref. or a 1,100 percent gain, not to mention a perpetual income stream of over 100% return.
In Moscow today common was up 1.8% and preferred up 3.4%. Not a big move from these levels but sure beats a 50% drop!! If they can survive another 24-36 months, expect those who held on to win big. All things looking good in my book - Crude Oil and Nat Gas holding firm - a good sign for Russia's economy. The next couple of years will be difficult because of the additional CapX needed for Elga so I don't expect much in the near to medium term - just hope the banks continue to be accommodative as they'll likely need to extend the debt repayments one or two more years beyond those recently announced for this to work.