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. Last Updated: 07/27/2016

Mechel to Spend $1.1Bln as Focus Shifts

The country's fifth-largest steelmaker, Mechel, said Tuesday that it would invest $1.1 billion in restructuring over the next four years to increase its focus on coal and iron ore, the more profitable side of its business.

"Focusing on coal and iron ore has been part of our long-term strategy," Mechel spokesman Alexei Sotskov said Tuesday. Steel currently accounts for about half of the company's revenues.

Mechel, which is listed in New York, also said it would raise the percentage of last year's net profit paid out in dividends to 50 percent from 15 percent.

The increased dividend payout ratio could give outgoing CEO Vladimir Iorikh as much as $95 million, analysts said based on their estimates of what the firm earned last year.

Of the $1.1 billion in investment, Mechel said it planned to spend $750 million to increase its annual coal production from 15.6 million to 25 million tons by 2010 by developing recently acquired greenfield sites and by further acquisitions. In the past year, Mechel has made a number of acquisitions in Siberia and in the Sakha republic that added 1.3 billion tons of coal to the company's reserves.

A further $350 million will go toward modernizing Mechel's sole steel asset, the Chelyabinsk metals plant.

The company will consider new steel acquisitions only "if they create synergy with our current business model," Sotskov said.

Denis Nushtayev, a mining analyst with Metropol, said the Chelyabinsk modernization follows a program by top Russian steelmaker Evraz that boosted profit margins for that company.

With the company's focus moving away from steel, the bulk of investment will pour into Siberia's huge coal fields, where Mechel already runs a number of mines and holds licenses for greenfield sites through its South Kuzbass subsidiary.

The steelmaker has plans to expand in Sakha, where it bought a 25 percent stake in state-controlled miner Yakutugol for $410 million in January last year. Last month, it presented a bid to federal authorities to increase its stake in Yakutugol to 50 percent.

If successful, Mechel would seek to merge its Yakutugol stake with state-controlled miner Elgaugol, which Mechel is interested in buying into. Elgaugol, which is located in Sakha, has an estimated 2 billion tons of coal reserves.

Russian Railways, which owns 30 percent of Elgaugol, said last week that it would sell its stake in an open tender, despite Mechel's hopes to strike an exclusive deal on the sale.

"Our projects in Sakha are the most thought out for the company, and ones we will see how we can develop," Sotskov said. In particular, coking coal, which is used in metal processing, remains a long-term priority, he said.

Some analysts were surprised by Mechel's decision to boost its dividend payouts.

Based on estimated net profit of $450 million for 2005, Deutsche UFG analyst Olga Okuneva said Mechel co-founder and CEO Iorikh could pocket $95 million on his 42.2 percent stake in the company. "This must be some kind of a record for blue chips," Okuneva said.

Last month, Mechel said Iorikh would step down in the next 12 months and sell his stake in the firm.