ArcelorMittal's Siberian Coal Assets Under Threat of Government Confiscation

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Researched by Industrial Info Resources (Sugar Land, Texas)--In a communication to ArcelorMittal (NYSE:MT) (Luxembourg), the governor of Kemerovo, Siberia, has threatened to confiscate two of the company's three coking coal mines in the region if the firm does not enhance the production of the mines. The governor, Aman Tuleyev, has stated that if ArcelorMittal cannot optimize production at these facilities, then the company should hand over the coalmines to the government authorities.

ArcelorMittal's three mines in Russia are located in the Kemerovo region, 1,850 miles east of Moscow. ArcelorMittal was the first among the few foreign firms to enter this sector of Russia. The mines, with total proven reserves of about 140 million tons and a combined production capacity of 3 million tons per year, were acquired from Severstal OAO (MCX:CHMF) (Cherepovets, Russia) in 2008 for $718 million. ArcelorMittal purchased respective stakes of 97.9% and 99.46% in the Berezovskaya and Pervomayskaya coal mines, along with the coal enrichment unit in Berezovskaya. ArcelorMittal also acquired the Zhernovskaya-3 coalfield and purchased a 100% stake in the Anzherskaya steam-coal mine from an affiliated company of Severstal.

In October 2007, ArcelorMittal, in association with Russian diamond company ZAO Alrosa (Moscow), decided to bid for coking coal reserves in Siberia. Both companies formed a Russian entity, ZAO Yakutskaya Ugolnaya Kompaniya, to bid for the reserves. However, Russian authorities refused to allow ArcelorMittal to participate in the auction. The reserves in Yakutugol and Elgaugol were subsequently awarded to OAO Mechel (NYSE:MTL) (Moscow) for $2.29 billion. The deposits were of strategic importance to ArcelorMittal and would have consolidated the company's stronghold in the country. Authorities were concerned that, with the acquisition of coking coal reserves in Russia, ArcelorMittal would pressurize and dominate the metals sector in the country, which would jeopardize national interests.

Facing the tough conditions the global steel industry is experiencing, ArcelorMittal announced in March that it was considering temporarily shutting down the Pervomayskaya and Anzherskaya facilities in a move to cut costs. A voluntary retirement scheme was also introduced at the facilities, while other employees at these mines were transferred to Berezovskaya. There has been talk of ArcelorMittal negotiating with investors and Kemerovo authorities about disinvesting in the Anzherskaya steam-coal mine.

Tuleyev indicated that although employees were receiving their wages, work was erratic and lacked transparency. Because the company has an experienced workforce, the market for coal was good, and the mines have substantial reserves, the authorities in Kemerovo would not allow a shutdown. Tuleyev was emphatic that if ArcelorMittal does not respond to its communication, the license to explore the 46 million-ton Zhernovskaya deposit would be cancelled. ArcelorMittal has proposed to begin exploration activity by 2012.

Russia is putting pressure on local government bodies to maintain economic stability in the country. Recently, Prime Minister Vladimir Putin coerced Oleg Deripaska, a Russian billionaire and other industry leaders to engage workers and begin operations of facilities that were closed down after the economic meltdown. Since reaching an all-time record high last summer, the price of steel has fallen by more than 70%, pushing steelmakers globally to realign production runs in order to even out prices. ArcelorMittal has stopped or decreased production and laid off employees in Belgium, Hungary, Brazil, the U.S. and France. In South Africa, the company terminated about 2,000 temporary and contract workers. ArcelorMittal has recorded losses for the second straight quarter. In the last quarter of 2008, the firm reported a loss of $2.6 billion, followed by a loss of $1.1 billion in the first quarter of 2009.

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