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. Last Updated: 07/27/2016

Troubled Mill Still Faces Challenges




Foreign investors in the Novolipetsk Steel Mill, or NLMK, claimed a major victory for shareholders' rights Wednesday after ending a two-year battle for control of the company, but they said the next challenge will be to put the plant back on its feet.


A group of so-called "reform shareholders" secured five seats on the mill's nine-member board of directors at a special shareholders meeting Tuesday in Lipetsk, some 450 kilometers south of Moscow. Their victory clears the way for a management shakeup and a restructuring of the plant's operations.


"Welcome to day one of the new Novolipetsk," Greg Bedrosian, managing director of MFK-Renaissance Capital's Sputnik funds, told a news conference Wednesday outlining future plans for the plant.


Renaissance Capital and Bahamas-based Cambridge Capital Management control a little more than 50 percent of NLMK's shares. But their efforts to gain seats on the board had been blocked until Tuesday by entrenched management and metals trader Trans-World, which holds 35 percent of the company's shares and had operated tolling deals with the mill for years.


The reform shareholders victory Tuesday was clinched with the help of Vladimir Lisin, the former chairman of the board, who had previously been aligned with Trans-World. Lisin controls 10 percent of NLMK's shares.


But the vote only went ahead after participants and observers were left waiting for two hours as the reformers went into 11th hour negotiations with Lisin.


"Our success closes one chapter and opens another," said Tom Gaffney, managing director of Cambridge Capital Management, on Tuesday after the results of the vote were announced.


After securing control of NLMK on Tuesday, the reform group moved immediately to inject desperately needed cash into the mill, transferring $10 million as part of a $50million credit line from Uneximbank. More funds are expected to be transferred by the end of the week to pay wages that workers haven't received since the end of September.


The payment is the first tentative step in a restructuring and investment program that the reformers hope will realize some of the potential the plant has.


Dmitry Bakatin, a rising star at Renaissance Capital and managing director of their legal department, estimated that more than $600 million needs to be raised to replenish working capital and replace equipment, despite the fact that NLMK has some of the most modern equipment of all Russia's mills.


The investment program won't begin, however, until an audit of the mill is completed. The accounting firm KPMG, which worked on the company's accounts before the dispute started, is the most likely candidate and work is expected to begin before the end of the year.


Despite a successful vote Tuesday, there are stumbling blocks ahead. The first is that the shareholders failed to agree on the new charter for the company.


One of the reasons the charter was not approved was a dispute over 5 percent of the 15 percent that MFK-Renaissance Capital won in a December 1995 loans-for-shares deal. The reform group maintains the 5 percent, which consists of preferential shares, are voting stock.


Another shareholders meeting is expected to be called within the next two months to vote on a new charter and hold an election for the post of general manager. An appeal case on the status of the disputed shares is due to be heard at early next year.


However, the biggest problem the reform shareholders will have to face is most likely to come from Trans-World, whose 35 percent stake in the plant is enough to block the passage of a new charter.


Trans-World is planning to sue NLMK for $300 million they claim to have invested into the plant, a Trans-World representative said at the meeting.


But Lisin disputed the claim, saying: "If they can show $300 million of investment then I am ready to give back $600 million."


In what could be another problem ahead, Trans-World have formed what they call a "strategic alliance" with Rossiisky Kredit, which controls the iron and ore mines that are NLMK's main suppliers, including the Mikhailovsky, Stolinski, and Lubiniski mines.


The reform shareholders, however, are looking to diversify both the plant's suppliers and agents to avoid precisely the problems that NLMK has been suffering from until now.


Whatever the outcome of these disputes, it promises to be a hard struggle, but having waited two years to begin the process, the reformers are determined.


"The task of restructuring that lays ahead will take an enormous amount of effort as well as time," Bedrosian said. "The reform shareholders group is dedicated to implementing these changes."