Cambridge Capital management today demanded that the board of the AO Novolipetsk Metallurgical Plant or NLMK disclose details of its secretive export trading relationships with offshore companies. NLMK exports in excess of US$1billion of steel products annually.
Cambridge Capital management represents parties controlling more than 25 percent of the shares in the giant steel producer. Last week Cambridge demanded detailed financial information from the company, to which it is entitled under Russian law, and now has instructed its director-nominee to request details of all export-related contracts as well.
"We are astounded by the company's poor operating performance when the depreciation of the ruble should be helping the company's profit margins," said Tom Gaffney, chairman of Cambridge Capital Management. "There is reason to believe that a connection exists between NLMK's poor results and the handling of its exports through offshore trading companies".
NLMK's net revenues for the first nine months of 1998 plunged by 29 percent from the previous year.
Unlike other steel producers NLMK does not appear to handle its own export sales, but channels them instead through offshore trading companies. Details of these transactions and any benefits of such trading methods for NLMK are unclear.
Last year, CCM protested the diversion of NLMK's trading business to a private offshore company based in Cyprus called Paragale Trading Ltd. Paragale was established in 1996 with directors provided by MFK Renaissance to facilitate a trading arrangement with Vladimir Lisin, NLMK's chairman. CCM believes that Paragale Trading Ltd may have been used to handle a significant part of NLMK's US$1billion annual export business.
CCM is seeking details of the export arrangements between NLMK and Paragale as well as details of its relationship with a Panamanian company, Mildmay S.A., as well as details of its relationship with a Panamanian company Mildmay S.A, in order to establish whether trading has been conducted on an arms length basis. Paragale has failed to file accounts and annual returns in contravention of Cyprus law according to a recent company search. CCM also wants to know who derives benefits from these trading companies and how profits on NLMK's export business are repatriated to Russia.
In a separate letter to the board of NMLK, CCM last week demanded an extraordinary audit of the company following its disclosure of poor results for the first nine months of 1998. The company's operating margin fell 27 percent compared with the first nine months of 1998. The company's operating margin fell 27 percent compared with the first nine months of 1997. Such poor results are inconsistent with the performance of Russia's other two major integrated steel producers, Severstal and Magnitogorsk, where margins improved by 64 percent and 34 percent respectively.
"The lack of transparency in the export business of one of the world's largest steel companies is astonishing" Gaffney said. "Furthermore, it is reprehensible that a major shareholder should have to demand an audit in order to extract the information to which it is legally entitled".
CCM finds NLMK's unexpectedly poor performance even more worrisome because it is Russia's more modern steel facility and is capable of producing high-quality products efficiently.
Cambridge Capital has been working since 1994 to introduce management reform at NLMK in order to see the company fulfil its potential as a world-class steel plant. In the period leading up to 1997, Lisin wilfully blocked CCM's legal right to representation on the board of directors of NLMK until a series of legal victories in the Russian courts forced the acceptance of shareholder representatives on the board.
Nevertheless, NLMK's management still operates without due regard to the company's shareholders as demonstrated by the recent announcement of a new US$100million share issue without prior discussion with major shareholders. Perhaps this is understandable given the management's failure to explain the cause of NLMK's financial difficulties or answer questions about how exports and revenues are managed.
CCM continues to challenge NLMK's managers to adopt greater financial transparency and better standards of corporate governance. This includes the adoption of arms-length, transparent trading and financial activities; elimination of related-party transactions; audits by international respected accounting firms, financial statements prepared to internal standards; open reporting and accountability to shareholders; and the development of investors and market friends programs.
"The audit has been requested in an attempt to force the production of information showing how the company is account for its revenues. It is surprising that other shareholders, such as the Sputnik Fund managed by MFK Renaissance, are not asking similar questions", Gaffney said.
Given the documented relationship between MFK and Renaissance and the private offshore companies handling NLMK's export trade, Cambridge Capital is concerned that MFK Renaissance is operating under a flagrant conflict of interest with its fiduciary responsibilities as manager of the Sputnik Fund's investors include George Soros's Quantum Fund and Harvard Endowment.
MFK Renaissance, led by Boris Jordan, was rebuffed in 1998 for attempting to dilute minority shareholders, interests in one of Russia's largest oil companies; AO Sidanco The Russian SEC was forced to intervene to protect minority shareholder rights by cancelling the dilutionary share issue. More recently Sidanco's creditors appointed a receiver following its financial difficulties and Jordan? resignation as Chairman.
- ENDS -
