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Evraz remains in limbo – but could the future be brighter?

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Evraz [LON:EVR], the London-listed Russian steel and vanadium producer, has, as the calendar has turned to 2023 remained in limbo following its suspension from trading on the LSE on 10th March 2022.

The company – one of the largest steel producers in the world – suffered from a similar narrative to Polymetal International [LON:POLY], the Russian gold and silver miner The Armchair Trader wrote about last week. Following the unprecedented and never-before-seen sanctions targeting the Russian economy both companies were suspended from trading and unceremoniously booted-out of the FTSE100.

However, Polymetal was seen to have a degree of separation from the Russian state – something that Evraz with a board including oligarchs, Alexander Abramov, Roman Abramovich and Aleksandr Frolov, could not claim.

Strategic exposure

Moreover, Polymetal, was seen as ‘less strategic’ to the war effort than Evraz and it moved rapidly to hove off its Russian exposure operationally and managerially, something that the less nimble Evraz has been unable to do, despite a raft of board resignations.

A former doyen of large cap investors, this time last year the company was still worth about GBP5bn, and as a constituent of the FTSE100 index, had been a part of many investor’s pension portfolios. That was until Russian tanks rolled across the border into neighbouring Ukraine in February 2022. Tanks – argued the British government and supported by the Financial Conduct Authority – that were in part made from Evraz steel.

The Russian steel manufacturer is a story of rags-to-riches, with the potential of an epilogue that might tell of a return to rags. Evraz started life in the post-Perestroika era following the collapse of the USSR when a group of engineers and scientists formed a steel trading company, Evrazmetall that supplied metals and raw materials to the Russian steel industry.

Vertical expansion

Within three years Evrazmetall was already vertically integrating by buying coking coal and iron ore mines and making its first tentative forays into steel production through the purchase of a controlling interest and then complete buyout of the Nizhny Tagil Iron and Steel Plant and the West Siberian Iron and Steel Plant. Under the leadership of Abramov, a former physicist who worked in the USSR’s space and defence industry, before going private and founding Evrazmetall when space and defence spending dried up following the collapse of the Soviet Union, the company went from metals logistics to global steel production very quickly.


Bringing on business partner, Abramovich and fellow scientist Frolov, Abramov hoovered-up failing steel mills in the second wave of oligarch consolidations in the former Soviet Union and by the early 2000s, following a floatation on the London Stock Exchange in 2005 started buying up steel and mining assets globally, including the purchase of Italian steel rolling mill, Palini & Bertoli in 2005.

International footprint

Further acquisitions saw Evraz’s portfolio expand to include assets in the Czech Republic, South Africa, Kazakhstan, Canada, the USA and Ukraine and blossomed in the commodities super-cycle of the early 2000s where steel producers just couldn’t produce enough steel to keep up with the rapidly expanding demand from an industrialising China, and other consumers in Asia and the Middle East.

However, the gloss started to rub off as the first decade of the 21st Century came to a close. Evraz closed down or moth-balled facilities in the Czech Republic, USA, and retreated from some of its mining investments as the global economy contracted as a result of 2008 global financial crisis, refocussing its operations on the former Soviet Republics.

The company refinanced its operations in 2019 with a RUB20bn bond issue, which it then invested into new production facilities in railway fabrications and announced that it was moving out of the coal business – something it backtracked on last year.

Expectations were high, and advisers were still tipping Evraz for good things, following its reorganisation. And then the invasion of Ukraine happened, and all bets (as well as trades) were off. The Armchair Trader covered the first acts of the soap opera that engulfed Evraz back in March, with Evraz losing 91% in the space of two months, going from 613p at the start of January 2022 to 53.1p by the first week of March.

Things didn’t improve much from there. First UK auditor EY walked away due to the company’s association with the Russian regime; Abramov and ten of his fellow directors stepped down from the board,  but despite this, the company’s US-dollar denominated debt was downgraded by the ratings agencies and the company was faced with default on its Eurobonds, despite sitting on substantial cash. Although the company did manage to appoint a new trustee and announced further potential divestments as the year closed out, it still seems a grim prognosis for Evraz in 2023.

Restructuring

It’s hard to say what the future holds for Evraz. Another famous Abramovich investment, Chelsea F.C. from which the former oligarch was forced out of last year, took a four-nil humbling at the hands of the plaything of new tycoons on the bloc, Abu Dhabi-backed Manchester City last night in the English F.A. Cup. Evraz still owns assets, and is still producing steel, and eventually the conflict in Ukraine will end.

That is of little comfort to Evraz stockholders today, and like Chelsea, more pain might be coming down the line before things get better as the company moves into a period of readjustment and reorganisation. However, the demographic reality is that populations – especially in Asia – will continue to grow and all those people will demand places to live, cars to drive and trains to catch to the office, notwithstanding the development of new energy infrastructure as the world transitions from reliance on fossil fuels. And all of these ‘needs’ will require steel – and lots of it.

The sale of its North American assets will release cash, and despite sanctions, Evraz remains an endurable, well-structured, low debt, free cash flow dividend-oriented machine. In its last published financials, from August 2022, Evraz maintained strong revenue growth (31% year-on-year) to USD8bn, a performance buoyed by coal sales, as the energy crisis affected the price of commodities associated with heating and electricity production. EBITDA was up 19% year-on-year to USD2.5bn with USD1.7bn in working capital and net debt still only 0.6x at USD3.2bn.

The company still works as a business, despite the geopolitical mood music, and although a speculative investment, given its current parlous state of affairs it’s not beyond the realms of possibility the the Russian steelmaker may return over the longer-term to being a sustainable, dividend-producing entity.

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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