It was reported on August 5 that Iranian authorities had permitted MMK (Magnitogorsk Iron & Steel Works) to buy a share in the Esfahan Steel Company (ESC), a maker of rolled stock and semi-finished products for builders. The company has the capacity to produce around 2.8 million tons of long products and 2.2 million tons of raw steel annually. For 2007, the company posted a profit of USD 455 million. ММК spokespersons previously said the company was interested in a majority stake in the steelmaker, while press reports said the company was eyeing a controlling share in the company. MMK's interest in the Iranian steel producer is linked with its large-scale supplies to the Iranian market. In 2007, MMK shipped over one million tons of steel to the Iran.
According to our estimates, MMK may spend roughly USD 1.5 billion on buying a 50% stake in Esfahan Steel Company, a rather high price for a company that ended 1Q 2008 with a net debt of USD 1.12 billion. In our view, the deal, if completed, may endanger MMK's positions in developed countries, many of which have political discords with Iran. Should the deal be completed, foreign investors may take it as a factor that increases political risks.
We do not currently have a recommendation on MMK shares.
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