Evraz (OTCPK: EVRZF) is an operating company that looks to be doing just fine. The coal business is being demerged, not that problematic from an ESG viewpoint business. As is common with businesses with Roman Abramovich as a major, even controlling, shareholder it looks well run. Not something we would always say about those varied businesses built up out of the rubble of the Soviet metals sector.
As is usual, there’s an interesting vanadium business attached to the steel one. The company is vertically integrated, exports well and has a useful collection of non-Russian businesses as well.
It’s not something that I would have written about in normal circumstances simply because there’s not much light I could shine upon it. Decently-run company in a decent enough industry, well, there we are. Seems reasonably valued – or at least it did last week.
Evraz does have operations in Ukraine but that’s not the worry is here. Yes, obviously, a war is not good for business and all that but the portion of the business that’s in Ukraine, plus the likely disruption of a war, does not wipe 35% off the stock price. It’s just not that large a piece of the business.
It’s also possible to worry about whether a successful invasion would lead to a reallocation of property rights. After all, we do know that who owns what – large assets at least – in the Putin system is at least partly a political, not property rights, system.
Abramovich though. He’s been rather careful to make sure he’s seen as someone outside the usual rumbles of Russian politics. Well connected, of course, in the loop, but not relying for his fortune upon political favor as much as some of the other oligarchs perhaps. There was even, those couple of decades back, talk that his purchase of Chelsea was exactly that, to show that he had a life and ambitions outside Russia and therefore was no inside player in Russian politics.
So, such a reallocation is not what is hitting Evraz.
The actual Evraz problem
The calculation goes like this. If Russia invades then sanctions will be applied to at least the oligarchical classes around Putin. That may or may not impact Abramovich and his holdings. It is also possible that sanctions would be applied more widely, upon the Russian economy itself. That would hit Evraz. In two different ways, one on its own export operations but also there would be problems with the London listing, with the American operations and so on.
So, there’s that succession of possibilities. Is there actually going to be war over Ukraine? If there is, are sanctions to be imposed? If sanctions, then how bad will they be and upon whom and which companies?
Thus that 35% fall in the stock price today.
So, what do we think will happen?
This is politics, not number crunching. We can only apply probabilities to events, there’s no certainty here at all.
Mine is that there’s not going to be a war over Ukraine. Largely because I can not see what Russia – or Putin, more importantly – would gain. Ukraine does not have any outstanding natural assets that Russia does not already have a plethora of. There’s no grand industrial base there that’s worth taking over violently. Putin’s secure enough in power that he does not need a foreign adventure to keep power.
So, what is actually going on? My read – and it’s just my opinion – is that this is all about Nord Stream 2. That’s the gas pipeline that goes down the Baltic to Germany and entirely avoids the overland routes through Ukraine. Putin wants that licensed and turned on. The US has imposed sanctions against it, the license is not yet forthcoming.
So, play nasty, get what he wants – the pipeline running – and the war threats all fade away.
I do emphasize this is only my opinion, backed up by no inside information from the Kremlin or anything.
If this is true then it’s all saber rattling, there will be no war and so the Evraz share price fall is well over done. So, it’s a buy.
That opinion could of course be wrong and if there is a war then Evraz is going to fall much further. Not because of damage to plant or the business, but because of the sanctions that will follow.
I’ve made clear my view – the market is too worried about the probability of war. So, I think Evraz is undervalued at this price. Assume war does not take place it’ll take time to go back to where it was but it will, I think, get there.
The investor view
This is the problem of course. My view is based upon little more than good feel and that’s a heck of a risk for another investor to take. If there is war then being bull Evraz will be a great way to lose money.
Everyone’s got to make up their own minds on this therefore. Assuming no war, Evraz is cheap, if real shooting breaks out then it’s expensive.