On Jan. 26, the company’s board gave approval for Russian mining and steel company Evraz to consider the move, which it said might have the potential to maximize long-term value for shareholders. Evraz is considering spinning off its coal business and is in the process of assessing the strategic merits of a potential demerger and its possible structures, the company said in a statement. The move, creating a purely steel business, would likely be a positive for the company in terms of environmental, social and governance (ESG) concerns, analysts at Moscow-based investment bank VTB Capital said Jan. 27.
At this stage, there is no commitment that the demerger will be undertaken, and the company has provided no timing for the final decision and potential completion of any deal. A demerger would allow Evraz to focus on developing its steel operations and establish its coal business, currently consolidated under Raspadskaya, as an independent leading regional producer of high-quality metallurgical coal, it said. If undertaken, the move would be subject to regulatory, shareholder and other third-party approvals.
Evraz started optimizing the structure of its two coking coal assets under public company Raspadskaya (90.9% owned by Evraz) in November 2020. That envisaged Raspadskaya acquiring Yuzhkuzbassugol from Evraz, and the shares were transferred by the end of 2020. The merged company has eight underground mines, two open pits and three washing plants in the Kemerovo region in the Kuzbass Basin and in the Tyva Republic, with a combined 1.9 billion mt of coking coal reserves and saleable output of 13.5 million mt in 2020.
Optimizing the structure of the coal assets would be a prerequisite for the potential demerger of the company’s coal business, according to analysts at VTB.
“There is no final decision on the deal and no structure has been announced, so it is impossible to assess the fundamental effect on Evraz’s equity value,” they said.
There might be some focus on the security of coking coal supply after the potential demerger, but it should primarily improve the company’s ESG positioning, according to VTB. Analysts from Moscow-based BCS Investment Group said that, although Evraz has coal presence, which is a “no-go” for some investors, they do not see demerging as a major positive. BCS analysts see the sale of Raspadskaya as the most viable option, and value its assets at $1.4-1.6 billion, noting their estimate represents 12%-13% of the current Evraz’s enterprise value.
“After the deal, the company’s coal integration will fall from 239% to zero with iron ore integration remaining at 79%,” they said.
The analysts said they do not believe the spinoff will have any strong fundamental impact given that the coal business is not a part of Evraz’s profit and loss basis. They added that, due to falling steel prices globally, any positive sentiment from the deal may be short-lived.
Evraz has steelmaking, mining and vanadium operations in Russia, the US, Canada, the Czech Republic and Kazakhstan. In Russia, long-rolled construction products comprise up to two-thirds of its finished steel output, with railway products making up a quarter. In North America, tubular products represent roughly a third of the company’s overall production, and flat-rolled steel and railway products just over 20% each.