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Mechel to Sell Donetsk Plant for $2.7K

Zacks Equity Research

Russian mining company Mechel OAO (MTL) has entered into an agreement with businessman Vadim Varshavsky to sell its Donetsk Electrometallurgical Plant AO for €2,000 ($2,683).

Mechel will divest 100% shares of Daveze Limited, which owns 100% shares of Donetsk Electrometallurgical Plant. Vadim will also have to repay Donetsk’s debt of $81 million to Mechel. Vadim will soon take over the operational management for the Donetsk plant. The agreement is expected to close in late 2013.


The divestiture of the plant will help Mechel in the present macroeconomic situation, as there is no expectation of significant improvements in the market where the plant operates over the next few years. The plant halted its operations in Nov 2012 and turned into an unprofitable business owing to the high scrap prices. 


The Donetsk plant accumulated a net loss of $16 million (on US GAAP basis) in the first quarter of 2013 with $50 million loss in 2012. Thus, the divestiture will enable Mechel to significantly improve its operational cash flow and prioritize its profitable business — mining and high value-added steel products.


Earlier this month, Mechel entered into another agreement to sell its ferroalloys assets to Turkey-based ferroalloys company Yildirim Group for $425 million.


Mechel will dispose Voskhod Mining Plant in Khromtau, Kazakhstan and Tikhvin Ferroalloy Plant in Tikhvin, Leningrad Region, Russia. The Tikhvin Plant produces up to 120,000 tons per annum of high-carbon ferrochrome that is used to produce stainless steel. The Voskhod Plant is a modern chrome ore mine that produces chrome ore concentrate.


Mechel plans to utilize the proceeds from the deal to deleverage and continue to finance its priority development projects. The divestiture of the assets is a strategic move by Mechel, in sync with the ongoing restructuring assets program that was approved by its Board earlier.


Yildirim Group will pay the total amount for the transaction to Mechel immediately after the closure of the deal. However, the deal’s closure depends on all necessary approval required from Kazakh and Russian regulatory authorities and from corporate management agencies of both the companies.


Mechel retains a Zacks Rank #4 (Sell).


Other companies in the steel industry with favorable Zacks Rank are Nippon Steel & Sumitomo Metal Corp. ( NSSMY), Ternium S.A ( TX) and Kobe Steel Ltd. ( KBSTY). While Nippon Steel holds a Zacks Rank #1 (Strong Buy), both Kobe Steel and Ternium retain a Zacks Rank #2 (Buy).

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