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. Last Updated: 07/27/2016

Mine Blast Threatens to Derail Evraz Plans

APRescuers waiting for their turn to enter the Ulyanovskaya mine on Tuesday. While analysts warned of problems, Evraz said its plans remained untouched.
The Kemerovo mine disaster threatens to disrupt the operations and plans of steel giant Evraz, which co-owns the mine and uses its coal to fuel its steel plants, analysts said Tuesday.

A methane explosion Monday in the Siberian region's Ulyanovskaya mine killed more than 100 people, making it the country's deadliest mining accident in more than a decade.

Evraz said Tuesday that it was too early to estimate the damage to the mine or the potential economic fallout for the company.

Alexander Abramov, Evraz co-founder and board member, flew to the site to assess the situation, said Irina Kibina, the company's vice president for corporate affairs.

Asked whether Evraz would adjust its plans after the blast, she said, "Nothing changes for now."

She declined to provide further details but stressed that the company was not to blame for the blast. "This is not negligence," she said. "This is a concatenation of circumstances. It's impossible to control nature."

Evraz, the country's second-biggest steelmaker, controls 50 percent of the mine's parent company, Yuzhkuzbassugol, which planned to go public this year. The rest of Yuzhkuzbassugol, Russia's leading coal-mining firm, is owned by its management.

Evraz global depositary receipts slipped 2 percent to $31.11 in trading in London on Tuesday, Reuters reported. Evraz is part owned by billionaire Roman Abramovich.

Monday's explosion will shut the mine indefinitely and could force Evraz to seek other coal suppliers.

"The company should be able to handle this situation by increasing the supplies from its other subsidiary, Raspadskaya, as well as other coking coal producers in the Kemerovo region," the Aton brokerage said in a note to clients.

Yuzhkuzbassugol produces 4.5 million to 4.9 million tons of the coking coal used by Evraz, representing 40 percent to 45 percent of the steel makers needs, Aton said.

The Ulyanovskaya mine represents about 11 percent of Yuzhkuzbassugol's total production, said UralSib, the investment bank.

A senior official at Raspadskaya, Oleg Kuzakov, said his mine had not changed its supply plans for now. Seventeen percent of its supplies go to Evraz, compared to 27 percent for MMK, its largest client, he said.

Kirill Chuiko, a metals analyst with UralSib, said he expected the Ulyanovskaya mine to remain closed for three to six months, with each month costing the mine $1 million and Evraz $500,000. The figures excluded the costs of damaged equipment and worker compensation.

Yuzhkuzbassugol promised to pay compensation of about 1.8 million rubles ($69,100) to the families of each dead miner -- an amount that could cost the company roughly $7 million.

The total amount is "relatively significant for Yuzhkuzbassugol but minor for Evraz," said Chuiko, adding the main economic losses would stem from the damage to the mine's modern equipment from Britain and Germany.

Vedomosti, citing a mining source, said it would cost about $200 million to open a mine similar to Ulyanovskaya.

Oleg Shishko, a spokesman for the Kemerovo region administration, said the future of the mine was unclear, but he expressed doubt that it would be closed. Both Shishko and a spokeswoman for Yuzhkuzbassugol, Marina Chalapko, did not know whether the mine had been insured.

Asked about the possible consequences for the region's economy, Shishko said he did not have any immediate figures but added, "This is the first time that Kemerovo is facing such a loss."

The disaster could discourage Yuzhkuzbassugol from going ahead with plans to float shares this year. It also promises to exacerbate existing investor concerns about the company, including its lack of transparency.

"Of course there are people who will refuse to buy shares in a company whose mines explode and kill hundreds of people," Chuiko said. "I think the IPO plans will be shelved for now."

In any case, he said, Yuzhkuzbassugol will need to explain what happened in the mine. Yuzhkuzbassugol posted a loss during the first six months of last year, according to UralSib.