An extraordinary audit of the Novolipetsk Metallurgical Plant (NLMK) has been demanded by Cambridge Capital Management, the international asset management company that represents parties controlling more than 25 percent shares in the major steel maker.
NLMK's performance has been lamentable with the worst operating results of Russia's three largest integrated steel producers. Cambridge Capital Management's chairman Tom Gaffney, said the poor performance raises questions about the company's management and plans for a new US$100 million share issue.
Russian law requires a company to conduct an extraordinary audit upon the request of a minority shareholder, but it can only be done by an internal audit committee. Cambridge Capital says it is unhappy that it cannot insist on an independent review of NLMK by a major international audit firm.
NLMK's operating margin fell 27 percent for the first nine months of 1998 from the first nine months of the previous year. At the same time, margins improved by 64 percent at Severstal and 34 percent at Magnitogorsk, Russia's other two major integrated steel producers.
Severstal has brought more transparency to its dealings and improved it operations essentially by drawing from its own cash flow while NLMK is appealing to shareholders for new infusions of capital. NLMK has what are widely believed to be better facilities and higher quality products than its competitors.
Cambridge Capital Management believes NLMK can be a world class steel plant, but only through greater transparency, good corporate governance, financial statements prepared to international standards and proper management practices aimed at enhancing value for all shareholders.
"Before any prudent shareholder can be expected to consider the new issue, they should receive proper explanations from Vladimir Lisin and the management for NLMKs dramatic decline in performance, particularly at a time when the ruble is weak and exports should be strong." Gaffney said. Lisin is Chairman of the Board of NMLK.
"The audit has been requested in the hope that it produces information showing how the company is accounting for its revenue. It is surprising that other shareholders such as the Sputnik Fund managed by MFK Renaissance are not asking similar questions" Gaffney said.
MFK Renaissance manages the shares in NLMK held by the Sputnik Fund, whose investors include George Soros's Quantum Fund and Harvard Endowment. MFK Renaissance, led by Boris Jordan, was rebuffed in 1998 for attempting a share issue that would have diluted the interest of minority shareholders in one of the Russia's largest oil companies, AO Sidanco. Russia Federal Securities Commission intervened and cancelled the issue. More recently, Sidanco has appointed a receiver following its financial difficulties and Jordan's resignation as chairman.
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