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UPDATE 2-Russia's Mechel to buy Oriel Resources for $1.5 bln

(Writes through with details, comment, background, share price)

MOSCOW, March 26 (Reuters) - Mechel MTL.N, the Russian steel and coal firm controlled by billionaire Igor Zyuzin, has agreed to pay $1.5 billion for ferro-chrome producer Oriel Resources OLR.L and increase access to valuable raw materials.

The all-cash acquisition will allow Mechel to more than double capacity of ferro-alloys used to make steel and also gives the New York-listed company control of chromite and nickel mines in Kazakhstan which Oriel was preparing to bring on stream.

“It’s premature to evaluate the price as most of the assets are not yet in production. But the ferro-chrome market is interesting and there will be a deficit in the short term,” said Alexei Morozov, mining analyst at UBS in Moscow.

Ferro-chrome, used in stainless steel, is trading at record highs as power shortages in top producer South Africa coincide with booming demand in China. Mechel is Russia’s No. 1 producer of special and alloy steel, with a 39 percent home market share.

The company said in a statement it would pay 219.86 U.S. cents for every share in Oriel -- a 13.7 percent premium on Oriel’s closing price on Feb. 29, the day before Mechel said it was considering an offer.

Oriel’s London-listed stock traded at 106.53 pence (212.7 U.S. cents) at 1255 GMT, up 1.2 percent.

“The acquisition of Oriel will enable Mechel to increase its competitiveness by expanding the existing ferro-alloy business, entering new markets and operating new production facilities,” Zyuzin, who is Mechel’s chief executive, said in a statement.

FERRO-ALLOYS

Mechel, which has a market capitalisation of $16.3 billion and has committed $2.7 billion to expanding its steel and mining business by 2011, expanded into ferro-alloys last year with its purchase of ferro-silicon producer Bratsk Ferro-Alloy Plant.

Those who sold Mechel the Bratsk plant are also investors in Oriel Resources, including Russian businessman Alexander Nesis. Nesis is the beneficiary of two vehicles that have undertaken to accept Mechel’s offer.

Oriel Executive Chairman Sergei Kurzin has also accepted.

“In the four years since Oriel’s foundation, it has managed to build a valuable portfolio of significant ferro-alloy assets,” Kurzin said in the same statement.

“Nevertheless, we believe that the offer from Mechel provides an attractive opportunity for Oriel shareholders to realise their investment.”

Oriel Resources ORL.TO, also listed in Toronto, last year launched production of ferro-chrome at a new smelter in Tikhvin, 200 km (125 miles) east of St Petersburg.

Last year’s output of 28,770 tonnes is forecast to rise to 148,000 tonnes this year and 180,000 tonnes a year by 2011.

Oriel imports chromite ore for the smelter but plans to launch its own mine, Voskhod, in Kazakhstan in the third quarter of this year. It also owns a nickel project, Shevchenko, in the Central Asian republic, which is slated to start in late 2009.

Mechel said it would use ferro-alloys produced by Oriel to feed its own steel mills and also sell some to third parties. Oriel has to date sold its ferro-chrome to commodities traders Glencore and DCM DECOmetal GmbH.

Spot prices for high-carbon ferro-chrome FECRO-HC-RU, the type produced at Tikhvin, have tripled in the last year to about $2.70 per lb.

Mechel, Russia’s largest coking coal miner, also said it would use its own coal to power Oriel’s smelting operations. (Additional reporting by Mark Potter in London; editing by Rory Channing)

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