Note Russian companies can't pay dividends to foreigners - this includes holding companies from operating companies. Evraz has minimal non-russia opcos, Poly has more in kazakhstan. Evraz has real risk of being totally worthless in current form - most of its debt is outside russia, most of its cash is in russia, the non russian asset is worth maybe USD 600m vs debt of near USD 2.5bn. Poly is in better shape, balance sheet wise.
No, share buybacks have the same issue of moving cash - to do a buyback, you need cash to move thru the company and that just became much harder. With no dividend upstreaming and a CB that will very carefully scrutinise foreign transactions cash is basically trapped in Russia (Evraz keeps most of its cash in russia in FX accounts).
Buybacks are banned for russian companies - foreign owners of shares are not allowed to sell. So e.g. Lukoil cannot buy back the shares held by foreigners as foreigners are prohibited from selling. This will last 6 months.
Evraz has a UK listing so is (as long as the stock can trade) able to do buybacks. The issue is to do a buyback Evraz needs to move cash from Russia to the UK and buy on the LSE. This is very hard to do, and politically doing a buyback when the Russian government has imposed capital controls will be a fast ticket to expropriation.
Cash reinvested - sure, but in what? Most modern equipment they need will be hard to come by, their mines are depleting resources, they could mine more but they'd have to fund that. They wanted to invest in the US asset, but how would they move money abroad? Finally, expropriation is now a serious prospect for Russian cos. Ask the Yukos shareholders how that worked for them.
I disagree on the political calculus. If the choice for EVRAZ is engage in buybacks w/ permission of Russian central bank and liquidation, the Russians will probably sign off on the buyback.
I have no insight into reinvestment in miners, not an expert. But even if they just hold the cash until either they need it or investors can access it that seems fine to me.
On cash - let's say RUB depreciates by 20% per year. Evraz must convert 80% of transactions at spot and can't reconvert. The value of cash will erode in USD terms so you have to price in that risk. Plus you have risk of more taxes on income, taxes on cash balances etc. Investing in a country which has capital controls has many ways to drive you bust.
It's not even a question of selling - evraz could sell all its output as usual but has to send 80% of the proceeds back to Russia. Cash builds up in Russia, where it can't leave. POLY has non russian ops that can upstream cash (they said they can cover dividends from payouts from Kazakh ops).
I still don’t get why trapped cash is such a bad thing. I get that dividends are off the table. But the cash doesn’t disappear. It can be reinvested to raise growth. Or it can (unless I am wrong) be used for buybacks.
My implicit assumption in the above analysis is that neither company has seen much fundamental interference with its business operations because either the sanctions will allow carve outs for key goods or Russia can sell mining products in China or whatever.
EVRAZ is a real company. If you don’t change that reality, the financial considerations seem to me short term.
Note Russian companies can't pay dividends to foreigners - this includes holding companies from operating companies. Evraz has minimal non-russia opcos, Poly has more in kazakhstan. Evraz has real risk of being totally worthless in current form - most of its debt is outside russia, most of its cash is in russia, the non russian asset is worth maybe USD 600m vs debt of near USD 2.5bn. Poly is in better shape, balance sheet wise.
Re: dividends two points.
1/ Couldn’t they get around this by using share buybacks to pay out?
2/ If the dividends aren’t distributed then they’ll just be reinvested, so more growth, higher price at equivalent P/E?
Open to being wrong.
No, share buybacks have the same issue of moving cash - to do a buyback, you need cash to move thru the company and that just became much harder. With no dividend upstreaming and a CB that will very carefully scrutinise foreign transactions cash is basically trapped in Russia (Evraz keeps most of its cash in russia in FX accounts).
I don’t follow this. Are buybacks banned or not?
And if they are, isn’t all cash reinvested and so we assume higher earnings growth?
Buybacks are banned for russian companies - foreign owners of shares are not allowed to sell. So e.g. Lukoil cannot buy back the shares held by foreigners as foreigners are prohibited from selling. This will last 6 months.
Evraz has a UK listing so is (as long as the stock can trade) able to do buybacks. The issue is to do a buyback Evraz needs to move cash from Russia to the UK and buy on the LSE. This is very hard to do, and politically doing a buyback when the Russian government has imposed capital controls will be a fast ticket to expropriation.
Cash reinvested - sure, but in what? Most modern equipment they need will be hard to come by, their mines are depleting resources, they could mine more but they'd have to fund that. They wanted to invest in the US asset, but how would they move money abroad? Finally, expropriation is now a serious prospect for Russian cos. Ask the Yukos shareholders how that worked for them.
I disagree on the political calculus. If the choice for EVRAZ is engage in buybacks w/ permission of Russian central bank and liquidation, the Russians will probably sign off on the buyback.
I have no insight into reinvestment in miners, not an expert. But even if they just hold the cash until either they need it or investors can access it that seems fine to me.
On politics - you are more optimistic than I am.
On cash - let's say RUB depreciates by 20% per year. Evraz must convert 80% of transactions at spot and can't reconvert. The value of cash will erode in USD terms so you have to price in that risk. Plus you have risk of more taxes on income, taxes on cash balances etc. Investing in a country which has capital controls has many ways to drive you bust.
Are you assuming EVRAZ won’t be able to sell its Russian mining output? My sense is that sanctions have carve outs for ‘essential’ products. No?
It's not even a question of selling - evraz could sell all its output as usual but has to send 80% of the proceeds back to Russia. Cash builds up in Russia, where it can't leave. POLY has non russian ops that can upstream cash (they said they can cover dividends from payouts from Kazakh ops).
I still don’t get why trapped cash is such a bad thing. I get that dividends are off the table. But the cash doesn’t disappear. It can be reinvested to raise growth. Or it can (unless I am wrong) be used for buybacks.
My implicit assumption in the above analysis is that neither company has seen much fundamental interference with its business operations because either the sanctions will allow carve outs for key goods or Russia can sell mining products in China or whatever.
EVRAZ is a real company. If you don’t change that reality, the financial considerations seem to me short term.
I hope you managed to get in before it stopped trading :-)