NEW YORK, March 23, 2012 /PRNewswire/ -- Mechel OAO, one of the world's largest mining companies, a producer of coal, steel and iron ore, might lose mining license for one of its key assets, Yakutugol subsidiary, due to major violations discovered by the Russian Ministry of Natural Resources. Yakutugol represents about 30% of Mechel's coal output and a substantial share of the company's revenues.
Rosprirodnadzor, the governmental watchdog, listed serious violations by the company. The violations can lead to termination of the mining license as well as criminal prosecution. "Mechel's price plunged 5.75% after the news broke, and is likely to continue decreasing, putting a downward pressure on Russian equities," says Michael Thompson, senior analyst for RUXX Index, which tracks Russian companies traded in the US and the UK. "Mechel clearly enters a period of uncertainty, both political and business. The Ministry will possibly allow the miner the time to fix some of the problems, but we estimate that the demand for Mechel stock will continue falling."
"The violations will be discussed at the Rosnedra commission meeting. Mechel representatives will be there, and the company will be required to correct the violations within a short time period," says Elena Koverga, the Ministry spokesperson.
This is not the first time Mechel had fallen out of favor with the Russian authorities. In 2008, in his now famous statement, Vladimir V. Putin threatened to send a doctor to fix up Mechel's founder Mr. Zuyzin, when he failed for show up for a meeting. Mechel's market capitalization fell $5 billion following the threat.
"Mechel situation illustrates the kind of political risk associated with Russian companies that are dependent on their connections with the government," comments Michael Thompson. "However, the Mechel case is special because of severity of the violations and large share of revenues represented by Yakutugol". The company issued a statement where it says that it will cooperate with the authorities.
RUXX, which tracks Russian equities, including Mechel OAO, fell 1.61% on March 22.
SOURCE RUXX Index