Oil Report

UPDATE 2-Russia's Mechel extends losses after coal mine blast

(Wraps Deputy PM, share price, mine explosion, adds comment)

MOSCOW, July 29 (Reuters) - An explosion at a coal mine owned by Mechel MTL.N prompted investors to ditch more stock in the embattled Russian miner on Tuesday, despite government assurances that the firm would not be seized by the state. Seventeen workers were injured in a methane explosion at the Lenin mine in Siberia, halting coal production at the mine a day after Prime Minister Vladimir Putin accused the company of tax evasion in a renewed attack on its domestic coal pricing policy.

“The government has once again demonstrated that it is the dominant player on the market and that its actions serve as important risk factors,” Troika Dialog analysts said in a note.

Mechel, owned by billionaire Igor Zyuzin, has lost more than half its market value, or over $8 billion, since Putin launched his first public attack on the company on Thursday. Its New York-traded stock opened down over 12 percent on Tuesday.

The ex-president’s criticism has prompted comparisons with YUKOS, once Russia’s biggest oil company, which was divided up and sold by the Russian state after massive back tax claims.

Government officials sought to play down such comparisons and soothe investor concerns stoked by Mechel and the dispute between BP BP.L and the billionaires who own TNK-BP, Russia's No. 3 oil firm and one of its biggest foreign investments.

First Deputy Prime Minister Igor Shuvalov said the Mechel case becoming another YUKOS was “a most unlikely scenario”.

“The most likely scenario is that the company will co-operate with the state authorities. We are intent on there not being any more stress,” Shuvalov was quoted as saying by Interfax news agency.

YUKOS shares tumbled after former CEO Mikhail Khodorkovsky was arrested in 2003 and investors lost billions of dollars as one of Russia’s biggest companies was bankrupted and then split up and sold off in parts.

“This is nothing scary. We will see what happens next,” Deputy Prime Minister Alexander Zhukov told reporters at a separate briefing when asked about Mechel.


Mechel owner Zyuzin, ranked Russia’s joint 12th-richest man by Forbes magazine, flew to the country’s coal-mining heartland on Tuesday to inspect damage from the methane blast at the Lenin mine, the company said in a statement.

His whereabouts have been unknown since he failed to appear, citing illness, at an industry meeting chaired by Putin last week. It was at this meeting that Putin first attacked Mechel.

Russia’s mining safety watchdog launched an investigation into a suspected breach of safety regulations at the Lenin mine, which accounts for about a quarter of the output from Mechel’s Southern Kuzbass subsidiary, after the second accident there in the space of two months.

The company is also under investigation by the Federal Anti-Monopoly Service over its pricing policy, and by the investigative committee of the Prosecutor General’s office over alleged tax violations.

Analysts said the anti-trust probe was prompted by complaints from Russian steel makers, who use Mechel’s coking coal in their blast furnaces, that the company had cut supplies in disagreements over pricing.

“Steel makers have effectively accused Mechel of not being a responsible corporate citizen in the domestic industry landscape,” said Vladimir Zhukov, senior mining analyst at Lehman Brothers in Moscow.

Alfa-Bank said in a note that any tax case could be much more damaging to Mechel than the anti-monopoly investigation.

“Assuming violations were committed by Mechel in the first quarter of 2008, the fines should not exceed $5 million. We believe that possible tax claims could be much more material.” Mechel shares were down 6.7 percent at $18.20 by 1445 GMT. To see a separate story on the mine explosion, please double-click on [ID:nL9128814] (Additional reporting by Guy Faulconbridge, Melissa Akin and Simon Shuster; Editing by Malcolm Whittaker)