By John Helmer in Moscow
Less than a year after announcing the purchase of major coalmine group Prokopievskugol for about $100 million, Vladimir Lisin, one of Russia’s richest men and proprietor of the country’s most profitable steelmaking group, Novolipetsk, is selling the coamine back to the state for a rouble. That is considerably cheaper than the half-billion dollar cost of saving miners’ lives at the Prokopievskugol shafts where 34 men have been killed in the past six months.
Prokopievskugol (“Coal of Prokopievsk”) has eked out a precarious living on the edge of bankruptcy and mine collapse for more than a decade. It has passed through the hands of several erstwhile owners. It was last owned by Iskander Makhmudov, a coal and copper magnate, who sold it to Lisin a year ago. It was included in a package of coal and coking assets, for which Lisin reportedly paid in two instalments, indicating that about $100 million was paid for Prokopievskugol immediately; another payment of about $90 million was delayed through much of last year. Lisin’s outlay compared with $147 million in coal sale revenues which Prokopievskugol earned during the first nine months of the year.
According to the last trading update from Novolipetsk Steel, Prokopievskugol produced 2.5 million tonnes of coking coal in 2006, down 6% from 2005. Energy coal output fell 36% to 507,000 tonnes. Price increases reported for the mine company from the third to the fourth quarter of 2006 were 9% for coking coal; 4% for energy coal.
Based in Kemerovo, the well-known coal-mining region of Siberia, the mine company operates seven shafts and three concentrators. In its last consolidated audited financial report — for H1 2006 — the steelmaker acknowledged the lossmaking at Prokopievskugol, but gave no hint it was intending to get rid of the coalminer, which had been entered on the Novolipetsk books early in 2006.
“Prokopievskugol Group,” according to the company statement, “made a net loss in Q2 and Q3 2006 due to unfavorable market prices and substantial SG&A expenses. The Company is undertaking a restructuring program of Prokopievskugol aimed at reducing these expenses.” The H1 2006 loss reported was just over $9 million.
A reference to “the Prokopievskugol turnaround” in the H1 report, and the improvement of prices in the second half of the year may have been intended for the minority shareholders of Novolipetsk. It appears not to have been believed by Lisin, nor persuaded him to invest in the turnaround. Accumulated losses by the miner for the full year are estimated at $49.6 million. This suggests that losses accelerated at Prokopyevskugol in the second half.
Lisin owns about 84% of the Novolipetsk group, and to put the coalmine loss in perspective, it should be noted that for the nine months to last September 30, the consolidated group enjoyed total revenues of $4.4 billion, and posted after-tax profit of $1.73 billion.
By most standards, Lisin could have afforded to absorb the coalmine loss, as his steelmill converted the coking coal into coke, and thence into steel. What proved more troublesome was Prokopievskugol’s accident record since he took over last year — and the capital cost of fixing it.
According to an industry report, a string of mine failures and accidents to Prokopievskugol miners last year, several of them fatal, led the Kemerovo regional government to pin responsibility on Lisin. The Novolipetsk website claims the group “aims to continuously improve its safety performance and ensure safe operating processes.” It reports that “occupational health and safety expenditures per employee have tripled since 2000.
The focus of the Company’s management on occupational safety yielded its results – the number of on-the-job accidents has dropped sharply. Since 1996 at NLMK’s main production site the number of accidents has lowered by 3.6 times – from 119 to 33 last year. The accident frequency rate declined 2.9 times (from 2.48 in 1996 to 0.85 in 2005).”
There is no reference to the accidents at Prokopievskugol, which have been confirmed by federal officials. The federal mine inspection agency Rostechnadzor told Mineweb the most recent accident at Prokopievskugol occurred last week, on February 2. One miner was killed, and one seriously injured. In December, a shaft collapse buried 10 miners; two were rescued alive; eight died. In September, 25 miners were killed. In August, an accident led to the emergency evacuation of 131 miners; noone was killed.
Last June, Novolipetsk acknowledged that Lisin had met Kemerovo governor Aman Tuleyev to discuss the safety problems at the mine. “On June 13 in Kemerovo,” a company statement disclosed, they had “discussed measures to improve the situation in the field of industrial safety. During the meeting they also discussed possible arrangements to increase salaries of the employees of “Prokopievskugol” Coal Company, a newly-acquired NLMK subsidiary. During the meeting Vladimir Lisin stressed that “serious efforts are needed to achieve stability, and we have the opportunity to increase the level of efficiency at “Prokopievskugol”. ”
Following the meeting, Tuleyev is reported on the steel company’s website as saying: “NLMK [Novolipetsk] is recognized as the leader in the Russian steel-making industry. We believe strongly that “Prokopievskugol” is going to benefit hugely from the ownership of NLMK which is renowned as a socially- responsible employer”.
A capital cost of at least $600 million has been estimated to secure the mine, lower production costs, and staunch losses. Lisin has now signaled he does not want to pay. But he is not prepared to admit this publicly.
Last month he and Governor Tuleyev met again. They have now agreed, reports a Moscow newspaper, that Lisin will transfer Prokopievskugol to the city of Prokopievsk for a rouble. Novolipetsk will not officially confirm the deal; a spokesman for Lisin has acknowledged that a disposal sale is possible. A spokesman for the company in Moscow, and Financial Dynamics, the London PR firm representing Lisin, were invited to explain what he had agreed with Governor Tuleyev, and why Lisin had changed his mind on investing in the coalmine.
Tuleyev, however, has not quite agreed to let Lisin off the hook for a rouble.
Tuleyev said through a spokesman that the two men met this week for a third time to discuss Prokopievsk. But the spokesman refused to clarify what had been agreed.
Local reports and industry speculation centres on a deal Tuleyev appears to have done to oblige Lisin to clear the debts of the coalmine company — estimated at Rb4 billion ($151 million) — before the governor will agree to the transfer of the mine to the city. As part of this deal, it is speculated, Lisin will not pay Makhmudov the $88 million final instalment of the purchase price for Prokopievskugol. Makhmudov, in turn, may then acquire the coalmine for a second time, cleared of its debts.
A spokesman for Makhmudov in Moscow told Mineweb he cannot comment on whether Makhmudov wants the mine back, and if so, on what terms.