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Severstal plans London gold listing

September 23, 2010 Comments off

“Severstal, the Russian steel company, is preparing to list its gold division in London this year in a deal expected to value the business at about $4bn, several people close to the company have confirmed.
Severstal – majority owned by Alexei Mordashov, a close ally of Vladimir Putin, Russia’s prime minister – plans to retain a stake of 65-70 per cent in the new company.

Nomura analysts this week valued Severstal’s gold division at $3.6bn. One banker involved in the transaction said the valuation was likely to hit $4bn or possibly $5bn as details about the assets and the company’s growth plans were disclosed to the market.”

Source: Financial Times, September 21, 2010

Observations:

  • Severstal has invested heavily in expanding the gold business through M&A and organic growth in the last years, growing into the second largest Russian gold miner (behind Polyus Gold) at 670 thousand ounces annual output.
  • Over 50% of the total exploration expenses in the mining industry are for gold exploration. This surge in exploration has resulted in a long list of deposits that might be developed profitably across the world.

Implications:

  • Severstal is developing projects in Burkina Faso, Guinea and Kazakhstan. The money raised with the IPO may be used to fund these developments, raising the output of the company. However, a major part of the money might be used by the steel division of the company to improve operating performance in steel making, which has been a loss making activity in 2009.
  • The spin-off of the gold division is a logical move of the company at the current demand for gold, which has driven gold prices to stable levels above $1000. Up to a few years ago, most gold mines were using long term gold prices of $300 in the feasibility analysis of mining projects. However, projects are started now that require prices above $600 to be feasible. The Financial Times provides a good overview of the development of gold prices in an interactive graph.

©2010 | Wilfred Visser | thebusinessofmining.com