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. Last Updated: 07/27/2016

Severstal Considers Gold Spinoff

Itar-TassA truck transporting coking coal at a Severstal steel plant in Cherepovets.
Severstal, the country's largest steel maker, is considering spinning off and floating its new gold business within five years after building it into one of the country's top four miners of the precious metal.

Severstal's billionaire chairman and main owner, Alexei Mordashov, told a conference Friday his company was also considering buying steel assets in the emerging Chinese and Indian markets as well as regions where it is already active.

"We believe there is an opportunity to be the third- or fourth-largest gold producer in Russia," Mordashov told the conference, which was organized by UBS.

"In four to five years we believe this could bring good value to shareholders, good returns," he said, adding Severstal could conduct an initial public share offering of its gold business at that time.

Severstal has started purchasing undeveloped gold fields in Siberia. Gold hit a 28-year high of $845.40 per ounce last week, less than $5 below a historical high fixed in 1980, and the metal has doubled in value in the last three years.

Severstal also had a revised $329 million bid for gold miner Celtic Resources accepted by the London-listed company's board. If completed, the deal will give Severstal access to gold mines in Kazakhstan as well as Russian deposits. Mordashov named Celtic and Highland Gold Mining as miners that could potentially be acquired at a relatively low price. Shares in London-listed Highland, Russia's fourth-largest gold miner, surged nearly 20 percent after his comments.

But he did not say Severstal was intending to buy Highland. A company spokeswoman said no negotiations were taking place between the two companies.

Mordashov, the country's ninth-richest man according to Forbes, said steel would remain core to Severstal's business and that the company was looking to expand its steel operations in Russia, the United States and new markets.

"We could do some acquisitions in geographical areas where we already have a presence. We are thinking of fast-growing economies like China, maybe India," he told the conference.

He said the high price of existing steel assets also made building new plants attractive: "Further valuation could be achieved through greenfield expansion because of the current cost of assets."

Severstal, which has a market capitalization of $23 billion, plans to invest $10 billion between now and 2011. It will spend $6 billion on steel assets in Russia, where the company says the construction market will grow by 20 percent to 25 percent per year to 2010.

"We're going to build three new mini-mills, with capacity of roughly 1 million tons each," Mordashov said. "We see a very robust market in the European part of the country."

Severstal is building two $500 million mini-mills to produce bars and wire rod for the construction industry. Both will be launched in 2010 -- one in Balakovo, in the Saratov region, and the other in Dzerzhinsk, in the Nizhny Novgorod region.

Another mini-mill to produce sections and tubes for use in the construction industry will require investment of $110 million and will be launched in the Vologda region in 2009.

Severstal's main steel plant is in the northwestern city of Cherepovets. The company also has assets in Italy and the United States.

It owns the former Rouge Steel plant in Dearborn, Michigan, and last month launched its SeverCorr joint venture in Mississippi to produce flat steel for use in car making, construction and other industrial sectors.