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. Last Updated: 07/27/2016

Mechel CEO Resigns, Sparking Breakup Talk

Mechel co-founder and CEO Vladimir Iorikh is to step down in the next 12 months and sell his 42.2 stake in the steel and coal producer, the company said Friday in a statement.

The move will allow the company's chairman and other co-founder, Igor Zyuzin, to take control of Mechel, lifting his 42.2 percent stake to at least 51 percent, Mechel said. Zyuzin has an option to purchase Iorikh's entire stake, currently worth about $1.7 billion, within 12 months.

The shift in ownership could signal plans to break up the company's steelmaking and coal businesses, analysts said.

Over the next year, Iorikh's responsibilities at Mechel, Russia's fifth-largest steelmaker, will be passed on to chief operating officer Alexei Ivanushkin, the company said. "I will fully cooperate with [Ivanushkin] during the transfer of responsibilities," Iorikh said in a statement.

"We're seeing all the steel generals relinquishing control and passing on the company management to others," said Timothy McCutcheon, a metals analyst at Aton. "And why not? This is a good time. U.S. steel prices are starting to weaken, ... and 10 years is a long time to be in the metals business."

In a similar move, Evraz Group's largest shareholder, Alexander Abramov, recently quit as head of the country's largest steelmaker.

Analysts were surprised by Iorikh's decision to get out of the $4 billion business he helped set up in the early 1990s. It could be the start of major restructuring, they said.

While half of Mechel's annual revenues come from steel, that side of the business requires a lot of investment, which cuts into profits, analysts said. "Their steel assets have not been very competitive," said Rob Edwards, a metals analyst with Renaissance Capital. Last year, the company's steel output dropped by 5 percent, to 5.9 million tons.

Analysts said Zyuzin would probably push for the development of Mechel's coal mining, where he has more experience. Mechel started as a coal mining company with several mines and processing plants in southwestern Siberia.

But even in coal, the company's current business strategy is causing concern, analysts said. Mechel raised production of steam coal last year, while cutting its output of more profitable coking coal. That increases its exposure to the energy market, which has different drivers, McCutcheon said. Steam coal is sold to power plants, while coking coal is used in metals processing.

How Zyuzin will finance the purchase of Iorikh's shares remains unclear. One of the options for Zyuzin is "a strategic partnership," Mechel said, without elaborating.

Vasily Nikolayev, a metals analyst at Troika Dialog, said Zyuzin would have no problem raising the money through bank loans should he wish to purchase the stake personally.