Russian Miners Rushing To London

Published in Investing on 25 October 2011

Polymetal, Polyus Gold and Evraz could soon join the FTSE 100.

Three Russian giants are set to list their shares in the UK, further extending the influence of ex-Soviet Union companies on the London Stock Exchange.

Russian to London

First up is likely to be Polymetal, which is set to float on or around 2 November. The gold and silver miner aims to issue 50 million primary shares at a price between 910p and £10.35 a share. The £455 million to £518 million raised will be used to reduce the group's debt.

At the top of this range, Polymetal would be worth close to £4 billion, qualifying it for inclusion in the elite FTSE 100 index of blue-chip firms. Thus, Polymetal would join two fellow ex-Soviet businesses in the FTSE 100, namely £8.8 billion Eurasian Natural Resources (LSE: ENRC) and £5 billion Kazakhmys (LSE: KAZ).

However, the problem for buyers of Polymetal shares will be its low free float. With at most 13% of its shares being issued in London, at least 87% of its shares will be held by its current owners. However, the group expects to have a free float of 50% over time.

Polymetal's owners include Czech banking magnate Petr Kellner (who has a 20% stake), chief executive Vitaly Nesis (19%) and Russian billionaire Alexander Mamut (9%). Together, these three tycoons own nearly half of Polymetal, so the group is firmly under this troika's control. Also, the three will not be selling any of their shares as part of this offer.

By Monday, 83% of Polymetal investors had agreed to cancel their Moscow-listed shares for shares in Polymetal International, a company based in tax haven Jersey to be listed on the London main market. Once acceptances exceed 85%, Polymetal can force the remaining Moscow shareholders to surrender their shares.

Free-float fears

Already, there are ten Russian and former Soviet firms listed on the London Stock Exchange and its junior market, AIM. Two of these are in the FTSE 100, but this number would swell to five when (or if) Polymetal is joined by Russian rivals Polyus Gold and Evraz Group.

Polyus Gold, Russia's largest gold miner, is majority-owned by oligarchs Mikhail Prokhorov and Suleiman Kerimov. Again, following an expected listing on 9 November, its free float is expected to be around 13%, the same as Polymetal. However, this is well below the usual minimum LSE free float of 25% of shares in issue.

Russian steel producer Evraz Group is 72%-owned by an investment fund partly owned by Russian billionaire and Chelsea FC owner Roman Abramovich. Hence, Evraz's free float will struggle to exceed 25% of its shares when it lists, expected to be on 7 November.

Good for investors?

Of course, floating in London brings many benefits for these Russian firms. As well as the cachet of having a UK share quote and being members of the FTSE 100, these listings will broaden their shareholder bases and make it easier for the companies to raise money in global capital markets.

However, I remain wary of firms of Russian heritage, because I view the vast, mineral-rich nation as the 'Wild East of robber-baron capitalism'. Nevertheless, if and when these three firms enter the FTSE 100, Footsie tracker funds will be forced to buy their shares. With such low free floats, volatile prices could result, which begs the question whether these firms should be listing in London at all.

As a final word of warning, I'd encourage all investors seeking to buy into any of these three firms, either at flotation or later, to learn the painful lessons from ENRC's corporate-governance scandal!

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Comments

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BarrenFluffit 25 Oct 2011 , 1:23pm

So is LSE dropping its free float standards while the Russian system is getting more corrupt. So are we improving their systems or being exploited...

theRealGrinch 25 Oct 2011 , 2:30pm

this is not good news for the ftse. sometimes principles must outshine grubby money. these ex soviet companies are here for the money it will raise despite their awful so called corporate governance. we dont need them and we dont want them here. we dont want a ftse which is nothing more than an ex soviet mining index.

F958B 25 Oct 2011 , 10:56pm

Commodity companies are dominating the FTSE nowadays.

Tell me; what happened shortly after technology companies dominated the FTSE in 1999?..............or is this time somehow different?

UncleEbenezer 26 Oct 2011 , 10:51am

F958B, would you add banks five years ago to that list?

Maybe it is different this time, in that the dominance is coming not from rampant growth but rather from foreigners looking for an easier regime to avoid tax, and a long tradition of practices that others would consider corrupt being perfectly legal.

F958B 26 Oct 2011 , 5:48pm

Uncle Ebenezer

Yes, I was troubled by the FTSE being dominated by financials (and by housebuilders entering the index).

Let's suppose that your suggestion is correct of: "foreigners looking for an easier regime" - it still seems very peculiar that the overwhelming majority of FTSE100 flotations are in the commodity sectors.

Just like when the venture capitalists floated Debenhams back onto the market a few years ago, you have to wonder why it is predominantly commodities being floated.
If I had a large, multi-national commodity company which I thought had a bright future, I'd hold tight.
When I felt that the cycle was about to take a major turn (commodity bear markets can be very nasty), I might look to offload at least a portion of my holding via a flotation.

In other words: if it will be so profitable in coming years, why are the insiders offloading their stakes onto the general public?

I should add that I am short-to-medium-term bullish on commodities and equities, but I believe that in 6-12 months time, I can see many converging factors which could cause the peak of the commodity bull, possibly marked by a major double-top. Much will depend on European policy responses though.

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