More downside for Evraz

A plunge in steel prices and a consequential share price slump resulted in Evraz being relegated from the FTSE 100 midway through June. This effectively removed any influence of blue-chip tracker funds, in addition to clouding market sentiment. Evraz is one of several Russian/CIS companies that have made their way on to the UK benchmark index, only to attract criticism due to a narrow free float - in Evraz's case about one-quarter of the shares - and the undue influence of majority shareholders, although it certainly isn't in the same bracket as the likes of ENRC in terms of its reputation for poor corporate governance.

Admittedly, shares in Evraz rallied on the release of its recent half-year report, despite the fact that cash profits were down by a fifth to $939m and a decision was made to can the half-year dividend. The group felt that a payout was unjustified given that the half-year loss per share had more than doubled to 7¢. The reallocated funds will help to cover the group's $1.6bn short-term debt. The good news for shareholders is that the group largely managed to keep a lid on costs through the period, while reducing capital expenditure by 12.9 per cent to $492m.

However, it's unlikely that the group will be able to free up its cash inflows despite progress in trimming costs. Analysts are now predicting that Evraz may be forced to tap the market again if it chooses to pay down borrowings, or if it decides to resume dividend payments through this year and next. Evraz certainly has form in this regard. In 2009, it issued shares and convertible bonds to bolster its balance sheet, when debt levels were broadly comparable. The implied multiple of cash profits to net debt now stands at 3.75 - just shy of the level that normally sets alarm bells ringing. At least Evraz's existing debt covenants are largely administered by state-controlled entities, so presumably there's a degree of leeway on offer. (The covenants are breached when net debt exceeds cash profits by a multiple of three or more).

The group could conceivably pare back a portion of its debt by hiving off non-core segments of the business. Evraz recently decided to temporarily suspend operations at its underperforming Palini e Bertoli's plate mill in Italy, and has confirmed that it's working with a potential buyer on the due diligence process for its troubled South African subsidiary, EVRAZ Highveld Steel and Vanadium. There's currently $916m in assets held for sale on EVRAZ's balance sheet, including the operations of Czech subsidiary Vitkovice Steel, but there's a possibility that the group might be forced to accept offers well short of the existing valuations. This point was borne out by the recent sale of its Russian subsidiary, Tsentralnaya TETs; a power generator with gross assets of $16.4m, which went for a token sum after incurring an interim loss of $9m. Despite the high hopes of management, it's hardly a seller's market.

Evraz could conceivably trade its way out of these problems, but the current outlook both for volumes and prices does not instil confidence. Steel demand across the EU remains weak despite some early signs of recovery, while low-cost imports from China continue to depress prices for Russian mills. The outlook for domestic industrial demand is little better, with Central Bank forecasts for Russian industrial growth in 2013 slipping from 2 per cent to 0.7 per cent.