Metals and Mining

We introduce an equation for Ukrainian Iron & Steel Works: Minority Value = Corporate Governance * Asset Quality * Investors’ Analysis Crucially, the larger Metallurgy and Mining Groups (MMGs) are just emerging in Ukraine, and the strategies of their owners (Corporate Governance) affect the stock prices (the apparent Minority Value) of the member companies (ISWs). Investors must understand the factors and patterns at play (Investors’ Analysis). In particular, it is beneficial to understand the intentions of an MMG owner and to react mindfully to Corporate Governance trends and moves that substantially distort Asset Quality, creating dangerous illusions. We suggest the investors play a long-term game and look for the underpriced, high quality assets that can still be found in the sector. Despite the development problems and tricks of Ukrainian MMGs, recognizing only them and overlooking genuinely underpriced stocks would be just another illusion.

Right after the March 06 AGM, Daniel Valk, Dniprospetsstal’s CEO, announced that a USD 200 mln program will be implemented by the company within 2 years, likely prior to the expected 2009–2010 IPO at a Western exchange. The company is adding the final ingredients in order to become truly stainless, securing long-lasting success for its shareholders. We update our view of the stock accordingly.

Enakievo Iron & Steel Works has been modernizing and expanding since 2000, and is poised to continue to progress until 2012. Until now, the company has utilized its conjoined sibling, Metalen LLC, which once enjoyed certain tax breaks, as a modernization vehicle. Now, Metinvest Holding LLC, the governing company of the Metinvest Group, is taking over modernization matters, and Metalen LLC will likely be acquired by ENMZ. The acquisition will likely be financed by an ENMZ share issue, which will dilute minorities’ shares. Furthermore, the financial benefits of the acquisition have been almost exhausted by the recent concentration of profits at Enakievo ISW and by investors’ excitement about the company’s stock. To avoid a correction in your expectations, price in now the likely impending stock dilution and the remaining financial benefits of Metalen acquisition. Even though ENMZ’s long-term prospects are bright, the coming 2008 will be a year of transition, possibly a turbulent one, for the company’s stock.

A UAH 5.53 Metinvest hint on its intentions? ENMZ’s Potential has unfolded in 2007. The significant 2000–2007 modernization and expansion program culminated in the July 2007 launch of Blast Furnace No 5, which is among the most advanced in the CIS. The company started to demonstrate profits, and the stock has appreciated 16 times YtD.

A ripe takeover target, Zaporizhstal is inferior to many Ukrainian and international peers as a portfolio investment, we believe.