RUXX Analysis: New Conflict With Minority Sharehol

NEW YORK, July 26, 2013 (GLOBE NEWSWIRE) -- Saven Enterprises Ltd, minority shareholder of Tomusinsky Coal Mine , controlled by Mechel OAO, a major Russian mining and metallurgical company, complained to the Russian authorities that Tomusinsky Mine and several production and trading companies affiliated with Mechel OAO transferred profits out of the company by giving out unsecured loans. Saven is seeking to reverse the loans and receive compensation for unpaid dividends. The conflict will likely affect the valuation of Mechel, which is traded on NYSE, according to the research note issued by RUXX, index that tracks Russian equities traded on international exchanges.

Mechel OAO has a history of minority shareholders disputes and transfer pricing accusations. In 2008, Russian then-PM Vladimir Putin complained on national television that Mechel uses unfair pricing schemes that can be considered tax evasion; the infamous press conference caused Mechel stock to drop 40%. In 2008 and 2009, Mechel had another dispute with minority shareholders that spilled over to the media and the courts.

Michael Thompson, RUXX senior analyst, says: "Mechel ADR is one of the few Russian industrial equities traded in New York and we have been following the stock for years. In the last three months, it dropped 38% and is unlikely to go up amid this new conflict. Mechel, despite its industrial nature, is a highly political stock and we believe it's more volatile than the general Russian market, which itself is very volatile."

"According to the arbitrage records, Saven claims that Tomusinsky Mine, controlled by Mechel and its subsidiaries, gave over 3.4bln rubles ($100mln) in loans to companies affiliated with the miner and left the parent company profit-free. This is the typical model for avoiding paying dividends to minority shareholders, and if the court sides with Saven, Mechel will certainly be affected," adds Thompson.

According to Saven's statement, the decisions by Tomusinsky to give unsecured loans were not authorized by the shareholders, which is against standard procedures in Russia. The minority shareholder hopes the court will be able to reverse these decisions.

RUXX analysts believe that Mechel, even though it is fundamentally strong, might be affected by the shareholders disputes and large debt burden (from 2008 to 2012 it went up 60% to $9.6bln).

Russian Industrial Leaders (RUXX) Index tracks Russian stocks traded on international exchanges.

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