By John Helmer, Moscow
If 85% of something was worth $320 million on March 27, then full value would be about $377 million. And if that something is identified as Highveld Steel & Vanadium Ltd. — a major South African producer of flat steel products and vanadium with which to harden steel — then how come that two days before, on March 25, the thing was valued on the Johannesburg Stock Exchange at just $140 million?
That Russians should want to sell at a 269% premium is plain. But if the evidence on the South African buyer’s side seems to defy commercial sense, two obvious questions follow — who in South Africa would agree to pay over the top for the asset, and why? The answer to the first adds mystery to the second – noone appears to know who the South African buyer really is.
Roman Abramovich and Alexander Abramov (left image) bought Highveld for the Evraz group in 2006 when they had the idea of taking a corner on the global vanadium market, and pocketing the capacity to charge the burgeoning steel industry, especially in China, with a controlled price for the required alloy. For a time the Evraz boys had up to 60% of the world’s raw vanadium supply within grasp. That story was told here . They never made it, and in time, helped along by the anti-trust authorities in the European Commission, and by the Americans too, they had to settle for less market dominance, less profit. In 2010 they tried to dispose  of Stratcor, their American vanadium asset.
Meantime, Highveld had already hit a peak of business success in mid-2008, when its share price struck Rand184.90. Expressed at today’s rate of exchange that represented a market capitalization of $2 billion. In short, the 85% stake Evraz had acquired two years before had jumped from $678 million million to $1.7 billion, on paper.
5-YEAR SHARE PRICE TRAJECTORY FOR HIGHVELD
From then on, accelerated by the global steel bust of autumn 2008, compounded by the weakening of ferro-alloy prices, there has been nothing for Highveld but trouble, costs, impairments, write-downs, and losses. The bottom-line has been in the red for several years. In 2012 the company lost Rand697 million ($75.2 million) in earnings before interest, tax, depreciation and amortisation (Ebitda). Pig iron production for the year fell 6% compared with the previous period to 620,000 tonnes, with crude steel output declining 16% to 572,000 tonnes, mainly because of a four-week strike by the National Union of Metalworkers of South Africa, caused by the introduction of cost-saving measures including a reduction in overtime hours. Steel prices for Highveld’s products fell across the board.
On the face of it, Evraz’s March 28 announcement that it is selling Highveld is a predictable decision to get out of a bad business. According to the company release , once rid of Highveld’s loss-making steel operations, it would continue to control the marketing Highveld’s vanadium output. “Our decision to divest the asset will allow us to enhance the Company’s focus on our key steel markets in Russia and North America. The transaction will allow EVRAZ to further develop our strategies of continuous operational improvement and building a growing vertically integrated business. We do not expect the transaction to affect EVRAZ’s leading position in the global vanadium markets. Our future growth in vanadium is based on an integrated business model that involves our assets in Russia, the United States, Europe and our remaining operations in South Africa. We plan to continue close collaboration with the future owners of the mill with respect to the vanadium business in South Africa.”
The deal terms, which Evraz claims to have agreed for its 85% stake in Highveld, include “cash consideration” of $320 million. The buyer Evraz has announced is “Nemascore (Pty) Ltd, black economic empowerment consortium… The Transaction will be the largest black economic empowerment transaction in the South African steel sector to date.” That sounds like a virtuous deed Abramovich and Abramov are doing. But what exactly is known about Nemascore, other than its colour?
That question didn’t matter to the local stock market which has registered a 50% jump in Highveld’s stock price since the announcement. This is understandable. Before the announcement Highveld’s market capitalization was the equivalent of just $142 million. In January it was worth even less – a record low of $137.5 million. Evraz’s share of that, on paper, was just $117 million.
In December Evraz says it valued Highveld’s  gross assets at “R3,667 million (approximately US$396 million).” So its share in the company was $336.6 million. At $320 million on March 28, Evraz seems to have gotten close to its asking price from Nemascore. The discount off Evraz’s valuation was $16.6 million, or 4.8%.
But Nemascore appears to have agreed to pay a premium over the prevailing market price of almost $200 million.
Viewed from Moscow, the deal was a good one for Evraz shareholders. A report from Moscow by Alfa Bank steel analyst Barry Ehrlich estimates that Highveld was earnings-negative in 2012. Evraz, he said, “is selling an asset with no meaningful EBITDA contribution in 2012 and probably 2013… Furthermore, the willingness to sell this asset may signal management’s interest in disposing of other assets in the international portfolio in the future.” The divestment, according to an Evraz website quote from chief executive Alexander Frolov, “will allow us to enhance the company’s focus on our steel key markets in Russia and North America.”
Evraz was asked to identify the name of the Nemascore representative who signed the term sheet for the deal which has been announced. Evraz was also asked to clarify why the price was so much higher than the market capitalization of Highveld in the interval preceding the deal announcement. Tatyana Drachuk, the company spokesman, declined to identify who signed for Nemascore: “Details of the negotiations are confidential, so we do not want to comment on them.” As for the valuation, she said: “the price of the transaction was the result of agreements between the parties.”
The focus in Johannesburg is different. David Gleason, South Africa’s leading investigative reporter, reports in today’s edition of Business Day that just one individual has been identified with Nemascore, and she appears not to have the cash for the deal. Reportedly, she is a friend and legal advisor to the President of South Africa, Jacob Zuma, and a property developer around Zuma’s home town.
Here is what Gleason has found out  about Nemascore and its big deal: “very little information is forthcoming. Where, for example, has the money come from? Is the [South African state-owned] Industrial Development Corporation, at the forefront of developing a major South African iron and steel sector, involved? For that matter, are the Chinese involved? China doesn’t need our steel but it is vanadium hungry and Highveld is a significant supplier. In fact, it is possible to argue that, at the price being paid for Highveld, the steel business is being sold dirt cheap and the purchase price really reflects its vanadium potential.
“What is also interesting is that one of Nemascore’s directors is advocate Linda Makatini, at one time a legal adviser to President Jacob Zuma and currently chair of the State Diamond Trader, a position in which, back in June 2011, she was accused in parliament of breaching the Kimberley Protocol by buying diamonds from Zimbabwe’s Marange Fields. Mineral Resources Minister Susan Shabangu came to her defence but neither confirmed nor denied that Makatini bought the diamonds. According to the Mail & Guardian, Makatini is a director of at least eight mining companies and owns a cutting and polishing business called Tumelo Diamond Cutting Works. She has also been linked to the developments around Nkandla, the president’s home village in KwaZulu-Natal.”
Makatini’s involvement in diamond trading violations was cleared by a parliamentary investigation in 2011 . Her earlier involvement in the sale of a stake in a state-owned South African oil refinery to China’s Sinopec group was above board and unchallenged, though unsuccessful at the time .
So what can possibly be untoward about Makatini’s involvement in a black, I mean front company with $320 million to buy back Highveld for the national estate? That’s exactly what SA’s black empowerment strategy is meant for.
The State Diamond Trader said today that Makatini is no longer chairman of the organization, but that she is keeping her seat on the 11-member board. Details of her departure and current whereabouts were requested, but were not made available.
So what is the white man’s beef? Gleason’s speculation is that if this were a regular transaction, the buyer’s identity would be open and recognizable, as would the source of its funds. A search of the South African media, however, turns up no reference to Nemascore at all – until the name appears in the Evraz sale announcement last week.
The speculation therefore is that Nemascore has been established to make the deal with Evraz, and continue to work with the Russian-directed management in global vanadium operations. Does this mean, therefore, that there are side agreements between Nemascore and the Russians on how the price gap – the difference between the market value of Highveld and the consideration reported to be paid – will be spent? According to Drachuk of Evraz, the company “does not intend to retain control over the production or export of vanadium of Highveld Steel. The company plans to buy at market prices from Highveld Steel vanadic slag for processing at its other vanadium production facilities of Evraz.”
In a flight of fancy – no allegation of wrongdoing — Gleason believes there may be a connection between the Highveld transaction and the campaign by the Russian nuclear reactor builder, Rosatom, a state enterprise, to set up shop in South Africa, and win billion-dollar contracts for the construction of nuclear reactors. This is a 5-year old story  – one in which the French and Americans have been notoriously effective in neutralizing the Russian competition. French tactics in the region have also run into investigations at home of alleged mismanagement by Areva, Rosatom’s rival in the SA reactor bidding, and of alleged kickbacks to French politicians and election campaign funds. Press the Uramin button  if you want to know more about a case in which Areva paid too much, much too much, for uranium in Namibia.
According to the communiques released  during President Vladimir Putin’s visit to South Africa last week, Rosatom, run by Sergei Kirienko, is campaigning hard to win contracts for new reactors, as well as for supply of enriched uranium fuel and processing of reactor fuel waste. According  to Putin, “we plan to sign a number of important intergovernmental and interagency documents in Durban: the declaration on strategic partnership, the agreements on cooperation in the energy sector, agriculture, etc.” Cooperation in the energy sector means, first and foremost, installing Russian reactors. Lobbying Zuma, after the failure of efforts to persuade his predecessor Thabo Mbeki not to favour the French and Americans, is bound to be part of the campaign.
The Areva-Uramin tale is a salutary lesson in what happens when a gap appears in the public record between money paid and value acquired. Evraz evidently wanted to get rid of Highveld’s losses from its balance-sheet, but retain access to vanadium supplies. That much is clear in the record so far. But now South African investigation of Nemascore will pursue what the apparent value gap in the transaction means, and who gains from it.
The betting in Johannesburg is that everyone gains — South African shareholders in Highveld, Evraz, the Kremlin, and President Zuma. As one African bookmaker says he is wagering, “give the black empowerment company a sweet deal and Rosatom will get one, maybe two new plants.”