* Russian metals firms set to exit blue chip index
* Metals prices to blame, foreign ownership under wider
* FTSE still appeals to miners, Russians stick with GDRs
By Clara Ferreira-Marques and Alessandra Prentice
LONDON/MOSCOW, June 12 Two Russian metals firms
which blazed a trail into the FTSE 100 are set to drop out of
London's blue chip index this month, leaving questions over
relations with investors, appetite for mining stocks and the
benefits of a cumbersome premium listing.
The departure of precious metals miner Polymetal
and steelmaker Evraz after less than two years signals
the end - for now - of a move into the major league that had
been expected to pave the way for more Russian arrivals.
It coincides with a debate around governance and controlling
majorities at foreign-owned miners after investors were burnt by
troubles at Kazakh miner ENRC and Indonesia-focused
While Polymetal and Evraz both have large foreign
shareholders - Evraz's biggest investor is Chelsea football club
owner Roman Abramovich - they have primarily caught out by
falling metals prices and demand worries that spooked investors.
"Evraz definitely faced the problem that it was the only
steel name in the FTSE 100," said analyst Boris Krasnojenov at
Renaissance Capital in Moscow.
"There's been a fundamental sell-off of Russian steel that
continues and we don't see many bright spots that would support
stocks. If any of the other steel mills were in the FTSE 100,
they'd be in the same situation."
Polymetal has been hit by the sharpest drop in the gold
price in 30 years, and relative weakness in silver.
Both shares have lost more than 40 percent this year, making
Polymetal the 121st biggest by market capitalisation and Evraz
the 155th biggest.
Any company falling to 111th position or below is
automatically deleted from the FTSE 100 each quarter, subject to
confirmation from the exchange. The latest quarterly review, due
later on Wednesday, will take effect at the end of this month.
While the exit can be primarily blamed on commodity markets,
analysts and advisers say it could put Russian rivals off moving
to once-coveted premium listings from global depositary receipts
(GDRs) that already let international investors buy shares.
A premium listing gives companies access to a deeper pool of
investment capital and opens the path to a high-profile FTSE
index - but it also carries more requirements around governance,
disclosure and ongoing reporting obligations.
"I wouldn't use the word hassle, but it is a question of
cost-benefit," Gary Schweitzer, a partner at Ernst & Young in
Moscow who is also capital markets director and IPO leader.
"The premium listing, because of the requirements for the
listing, in addition to ongoing reporting obligations, is right
now less popular."
Russian potash producer Uralkali, for example, had been
considering a premium listing around the time of Evraz and
Polymetal's entrance to the FTSE, but has since said it sees
little additional shareholder value in moving up from GDRs.
London's allure remains and particularly for mining and
metals groups - with Asia seen as a more strategic destination
for firms seeking Chinese buyers or partners and a U.S. listing
preferred for technology firms.
The London Stock Exchange's deputy head of primary markets,
Jon Edwards - responsible for developing business in the former
Soviet Union and Eastern Europe - said there was still appetite,
with many metals firms preparing for a window of opportunity.
But he too pointed to the ongoing attraction of GDRs, which
foreign investors often use to invest in companies based in
"(A premium listing) is still something that Russian
companies may consider, but they will take a careful look at
cost-benefit because the GDR market is still very effective," he
said, pointing to Russian companies as among the most traded.
"It is still a very solid tool, a deep market, and there is
quite strong liquidity."
Based on volumes so far this year, the LSE is expecting 2013
trade volumes of $300 billion on its international order book -
or GDR market - the vast majority of which are Russian. This is
up on historic levels but below a peak of $500 billion in 2011.
Undoubtedly, Russian and other former Soviet Union companies
aiming for promotion will face deep scepticism from investors
burnt by ENRC and BUM, who have questioned listing rules.
For now, the only remaining name from the former Soviet
Union in the FTSE 100 is ENRC. Although the rules mean it looks
set to retain its FTSE 100 place despite the 103rd biggest
company, a potential buyout bid from its trio of billionaire
founders may take it private.
"A company like Polymetal is a well-run company that has
suffered from plunging gold and silver prices but at the other
end of the spectrum you have poor cost control, poor capital
allocation, poor governance," said analyst Nik Stanojevic at
stockbroker Brewin Dolphin.
Even once darling stocks like Petropavlovsk offer a
cautionary tale. Teetering on the verge of breaking into the
FTSE 100 in 2009, the gold producer now looks like it could drop
out of the FTSE 250, weighed down by a sharp drop in bullion
prices, a strained balance sheet and aggressive short selling.
"The principle reason for being listed is to give you
currency to buy things and at the moment we are so lowly valued
that it is an expensive exercise," Petropavlovsk chairman Peter
Hambro said, adding the company was not currently considering
stepping back from a premium listing.