Mechel Offers $1.5Bln for Oriel

Metals firm Mechel has agreed to pay $1.5 billion in cash for Oriel Resources, a London-based chrome and nickel miner, in an effort to boost its business in the ferroalloys used to make steel, amid a period of high commodity prices.

Mechel, Russia's largest producer of stainless steel and coking coal, said in a statement that it had secured agreement from shareholders, who control 47 percent of Oriel, to buy their stakes.

"The acquisition of Oriel will enable Mechel to increase its competitiveness by expanding the existing ferroalloy business, entering new markets and operating new production facilities," Mechel chief executive Igor Zyuzin, who holds a controlling interest in the company, said in a joint statement from the two companies.

Oriel, which is listed in Toronto and on London's Alternative Investment Market, has three main assets: the Voskhod chromite mine, which is scheduled to come on line later this year, the Shevchenko nickel project in Kazakhstan and the Tikhvin ferrochrome smelter in the Leningrad region, which started production last year.

Chrome and nickel are the two alloys used in making stainless steel.

Mechel said it would use ferroalloys produced by Oriel in its own steel division, and it also plans to sell them to third parties.

Among Oriel's shareholders is Alexander Nesis of IST Group, who holds a beneficial interest through two holding companies. Israel's Baran Group holds a minority stake, while Alexander Mamut, formerly of Troika Dialog, is understood to have a stake in the company, Interfax reported.

"In the four years since Oriel's foundation, it has managed to build a valuable portfolio of significant ferroalloy assets," Oriel executive chairman Sergei Kurzin said in the statement. "Nevertheless, we believe that the offer from Mechel provides an attractive opportunity for Oriel shareholders to realize their investment."

Mechel has earmarked $2.7 billion for the expansion of its steel and mining business over the next three years. Olga Okuneva, a metals analyst at Deutsche Bank, said the acquisition of Oriel "fits in very well with [Mechel's] strategy."

Mechel, which has been involved in mining nickel since 2001, bought Bratsky ferroalloy plant last year, and is set to benefit from soaring prices for chrome and nickel.

"We are talking about components for stainless-steel producers, which can be exported easily to China, or to other Asian countries, which are experiencing a significant surge in stainless-steel production," Okuneva said. "Prices for ferrochrome are going through the roof."

Ferrochrome prices have shot up after power shortages led to supply problems in South Africa, the world's largest producer of the alloy, and analysts said they did not expect the supply issue to be resolved in the near future.

"The ferronickel outlook also remains strong because nickel prices are above average," said Alexei Morozov, a metals analyst at UBS. "In the next several years, there will not be much new supply coming to the market."

In the first half of 2007, Oriel posted a net loss of $6.8 million. Restructured after a reverse takeover in 2006, analysts said the company was at an early stage of its development, investing heavily in assets before it can reap the benefits of its investment.

Mechel's offer is a 14 percent premium to Oriel's closing price as of Feb. 29, the day before Mechel informed the markets that it was considering an offer. Since the beginning of this year, Oriel's share price in London has more than doubled, closing up Wednesday at 106.25 pence.

The deal is still subject to approvals from anti-monopoly authorities in Russia and Kazakhstan, Mechel said.