IUD Negotiating a Merger with Russia's Metalloinvest?

According to media reports, Russian holding Metalloinvest, controlled by Russian steel magnate Alisher Usmanov, has agreed to merge with the Industrial Union of Donbass (IUD). Representatives confirmed yesterday that a meeting took place, but did not confirm that any merger agreement was reached. The Russian side is rumored to be seeking USD 17-20 bln. Eugene Cherviachenko: We think at this stage that IUD and Metalloinvest are considering a partnership agreement, including suppling iron ore from Lebedinsky and Mikhailovsky Iron Ore, owned by Metalloinvest, to IUD’s steel mills. According to IUD representatives, Metalloinvest will start shipping iron ore to IUD’s steel plants in 1Q07. IUD, which has no iron ore assets, encountered problems with iron ore supplies as a result of its conflict over ore prices with its long-standing domestic supplier, Inguletsky Iron Ore (IGOK). In early February, IUD had to conclude a short term contract with Brazilian iron ore producer CVRD, but the resulting feedstock price was much higher than the price IUD was paying before. We think that IUD and Metalloinvest are complementary in terms of their businesses, the former controlling steel mills and the latter iron ore producers. IUD’s Ukrainian steel mills, Alchevsk Iron & Steel (ALMK: BUY) and DMK Dzerzhynskogo (DMKD) would benefit from stable iron ore supplies. We think the merger could be a sensible outcome of the negotiations between IUD and Metalloinvest, yet it is too early to say it’s a done deal.