Fitch affirms "BB-" rating of Russian iron, steel company

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MOSCOW, October 17 (RIA Novosti) - International rating agency Fitch Ratings, has affirmed Magnitogorsk Iron and Steel Works' (MMK), Russia's largest steel mill, senior unsecured rating at "BB-" with a stable outlook, an agency news release said Monday.

"The rating reflects MMK's strong track record in terms of financial performance and accessing capital markets, competitive domestic positions and ability to exploit rising demand for steel in Russia. It also takes into account MMK's planned shift in focus to value-added products to support revenue growth. Strong financial metrics, significant modernization, and a track record in conservative financial management underpin MMK's credit profile," the document said.

However, Fitch said the rating was constrained by the company's limited transparency. MMK changed its shareholding structure to be wholly private, dominated by financial institutions, following ownership changes in December 2004, leading to limited disclosure of the ultimate investors due to a trustee-type structure. Fitch also noted a change in dividend policy during the first half of 2005, which may indicate a bias toward shareholder-friendly actions.

MMK's sales are primarily generated in the domestic market (55% in 2004), in line with the company's strategic focus, while MMK's regional location provides a competitive advantage. Specifically, about half of its domestic sales are generated in the Ural region alone, an area with a high concentration of metal and machinery-building plants, the statement said.

"In contrast to its domestic peers, MMK has limited control over raw material supplies, so the company has historically relied on supplies from Russia and neighboring countries. However, the company faced significant disruptions in iron ore supplies in spring 2005, which emphasized its vulnerability in relying on regional suppliers with vested interests in the Russian steel sector. As a result, MMK is expected to focus on vertical integration by increasing its control over raw materials by acquiring mining assets," the statement said.

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