Why Russia's leading steel baron is betting big on America
 
Iron Man
December 10, 2007
Heidi Brown

The recent opening of the first new American steel mill in six years was a big deal for Columbus, Miss. (pop. 26,000). The few hundred residents and politicos who ducked into the plant to escape a chilly rain encountered an odd tableau onstage: a steel executive, a Russian billionaire and Governor Haley Barbour. The proceedings opened with a prayer. "God of hope and possibilities," the Reverend Sandra DePriest intoned, "thank you for bringing together your servants Alexey Mordashov and John Correnti from opposite sides of the globe."

Thanks, as well, to the town, Lowndes County and the state for SeverCorr, as the $880 million mill is known. Together they offered $100 million in onetime grants, construction funds and loan guarantees, plus tax abatements of $5,000 per employee for ten years. How could Mordashov--whose $12.1 billion net worth makes him Russia's ninth-richest man--say no? Most of that fortune comes from Severstal, Russia's largest steel producer, which last year netted $1.2 billion on revenue of $12 billion. "We make a lot of money," says Mordashov, 42, who is given to few words. "We're looking to expand abroad to create value."

And assemble something of an empire--maybe even rattle Mittal Steel (nyse: MT - news - people ), the world's undisputed king. The U.S. already accounts for 19% of Severstal's revenues. It seems like a good bet. Despite troubles in the American auto industry, there are plenty of domestic customers for hot- and cold-rolled steel; rising commodity prices, coupled with a dirt-cheap greenback, have recently lured other foreign buyers--including Russia's Roman Abramovich and Victor Rashnikov, and the Ruia family of India--to U.S. mills.

Mordashov has vowed to spend a total $1 billion, 10% of total cap-ex, on U.S. properties through 2011. He became the first Russian steel baron to venture overseas when, in December 2003, he beat out U.S. Steel (nyse: X - news - people ) to pick up the storied, if troubled, Rouge Industries plant, which supplies the nearby Ford factory, in Dearborn, Mich. He paid $385 million (including assumed debt), considerably less than the replacement value of the assets. He won by securing the union's vote (and an okay from the bankruptcy court), promising not to lay off any workers. Despite expensive improvements like a new blast furnace and an air vacuum to keep pollution from seeping out, Rouge netted roughly $83 million pretax on $2 billion in sales last year.

In 2005 Mordashov bought 70% of the assets of Lucchini, Italy's second-largest steelmaker (2006 revenue: $3.3 billion), which added higher-margin long-steel goods to his portfolio and gave him a 20% share of the European market. The $600 million price tag, added to Lucchini's $1.3 billion in debt, seemed steep at the time. But steel prices have since doubled, helping to reduce that debt to $749 million.

Acquisitive as he is, Mordashov has had several humiliating setbacks. His biggest defeat came last year at the hands of Arcelor (2005 sales: $39 billion). Then the world's largest steel firm, it turned to Mordashov to fend off a hostile $22.7 billion takeover by Indian billionaire Lakshmi Mittal. Mordashov jumped in, with a hazily valued offer to exchange 90% of Severstal for 32% of Arcelor, which was accepted in May 2006. But in June Mittal came back with a winning bid that was higher. "It was embarrassing for [Mordashov] in Russia," says Robert Edwards, an analyst at Moscow's Renaissance Capital, who says the incident was discussed in the Duma. "He was treated like a schoolboy." Concedes a Severstal spokesman, "It was very painful." So, too, undoubtedly, was the payback from U.S. Steel, which, on Oct. 31, outmaneuvered Mordashov to grab the bankrupt Stelco, a 4-million-ton producer in Hamilton, Ont. he'd been negotiating to buy for three years. He also reportedly went after Mexico's largest steel company, the bankrupt Ahmsa, but the leading shareholder wouldn't sell.

Don't be fooled by the occasional shellacking--or Mordashov's lack of ostentation. He doesn't collect art or mansions all over the globe. He was impressed with the tour bus bringing visitors to SeverCorr and enjoyed wolfing down ribs at the preopening barbecue. But this guy is tough and unyielding.

Mordashov grew up in Cherepovets, 250 miles northwest of Moscow, where both parents worked at what became Severstal, a steel mill built on Stalin's orders. After graduating from the Leningrad Engineering & Economics Institute in 1988, Mordashov mastered accounting and attracted the notice of the mill director, who became his mentor and hired him as a senior economist. Quickly noticed for his smarts and work ethic, Mordashov was sent on a rare six-month internship in Austria at steel giant Voestalpine and in 1992 became Severstal's finance director. By then the communist system had disintegrated into chaos. Manufacturers like Severstal, dependent on the command economy to dictate production, were suddenly left without customers, suppliers or any idea of how to sell to foreign markets. At the same time factories were being privatized in not-always-kosher ways, with clever metals traders taking control by buying the shares of management and workers on the cheap.

Mordashov claimed he wanted to protect the mill from takeover vultures like Oleg Deripaska, an aluminum tycoon, so he created a unit called Severstal Invest that sold the mill's steel and provided cash to buy up the shares held by factory workers. By law the plant could own up to 24% of Severstal Invest. Mordashov claims the factory's "company council" voted to give him, and not the director, his supporter, the other 76%--effective control of the entire company. "People weren't interested in having shares," he says, denying reports that management withheld salaries to "motivate" workers to sell. "The privatization was completely in line with the law," he says. There's no bad blood, Mordashov insists, between him and the director who "lives happily in Sochi" on the Black Sea.

He himself has kept his head down while restructuring and updating Severstal. Unlike some Russian moguls, Mordashov has stayed on the good side of Vladimir Putin by keeping out of politics and consulting the president on large international deals, as he did with Arcelor. There was a brief kerfuffle in 2004 when, seeing the price of raw materials rising, Mordashov started integrating a publicly traded Severstal subsidiary that owned coal and mining assets. He paid minority shareholders $8 per share; some insisted they were worth $16 and said he was stripping assets. But he later settled with the shareholders, and nowadays Severstal resembles a Western steel company, with annual reports in English, a British board chairman and emphasis on production increases. It did a $1 billion listing on the London Stock Exchange last year.

When a group of American steel executives needed funding for what became SeverCorr, Mordashov came to mind. The project was the brainchild of David Stickler of Global Principal Partners, a metal-focused investment bank in Miami. Well connected and energetic, Stickler became involved in every aspect. In 2003 he approached former Nucor (nyse: NUE - news - people ) chief John Correnti, who had been shoved aside in 1999 following the retirement of his supporter and mentor, steel legend Kenneth Iverson. Correnti then ran the troubled Birmingham Steel, which he broke up and sold off, largely to Nucor. With Correnti on board, Stickler embarked on a multinational journey to line up partners and financing.

For plant equipment, Stickler went to Germany's SMS-Demag, which had recently found a way to produce auto-grade steel from scrap metal. The government export bank KFW, with $9 billion worth of exposure in the U.S. by then, said it would provide $227 million in senior debt, but wanted a U.S. partner and a strategic investor. GE, which had worked with Stickler and KFW, contributed $50 million in secured financing. Stickler had met Mordashov early in 2005, but the Russian had said he was too busy with Rouge. Ten months later, though, Mordashov bit and eventually contributed $440 million in cash, or 80% of the equity; the rest came from Correnti, his partners, Stickler and hedge funds.

Next, finding a hospitable home for the plant. Arkansas expressed interest, but the project foundered when the state's electric authority demanded an extra charge--$8.5 million--to build a power line to the plant. Mississippi, still recovering from Hurricane Katrina and plagued by unemployment of 6.4%, proved more accommodating. Lowndes County had also lost textile mills and a small auto-parts factory. SeverCorr got concessions worth $103 million, including $30 million in grants and a $60 million loan guarantee. The Tennessee Valley Authority (nyse: TVC - news - people ) built a power line to the plant at half the price Arkansas' authority demanded. Customers like Toyota (nyse: TM - news - people ), Mercedes, Honda (nyse: HMC - news - people ) and Hyundai all operate nearby, minimizing shipping costs, which have quadrupled on the price of oil in the last two years. The plant isn't unionized, but Correnti says that's irrelevant; workers will earn an average $85,000 per year--a fortune compared with the average $27,000 per capita in the county. "We want the rural work ethic," he explains. "We want five people who will do the work of ten."

Mordashov is working overtime, too. He plans to take an 80% interest in a second, $500 million production line at SeverCorr due to open in the next year and a half. The Mississippi plant, he says, will be profitable by year-end 2008. What's next? Perhaps more mills, bought or built, in the motherland. No limits there--as long as he stays out of politics.

Copyright © 2009 Global Principal Partners LLC. All Rights Reserved.