My daytime job is as a fund manager focussed on Russian stocks, and one of the less pleasant aspects of my job is the automatic impulse to make money by gambling on the long term consequences of various disasters. In 1994, a couple of months after I started working in the investment business, the General Director of Megionneftegaz was killed. That day we got an order from a client who said, "If it's worth killing someone for, it's worth buying the shares."
So the market immediately responded to the dreadful accident at Sayano-Sushchenskaya GES, one of Russia's largest hydro-electric power stations, by selling off the shares of its owner, RusHydro. The stock is now down 23% on its close before the accident. Happily we don't own it, but I would be inclined to sell it further. Firstly, as we saw in the case of Mechel and Uralkalii last year, once the market takes against a stock, there tend to be two or three legs down. First the fast money sells, and then the larger, slower funds take a week or so to think about it, and decide whether to buy on the dip, or just to get out. This normally gives you a short recovery, then further falls, until there is some concrete proof that the original causes of the fall have been eradicated. So just on liquidity grounds, you can expect more selling, especially as the stock has had a good run this year - it's up 67% YTD, even after the recent fall.
Second, this accident tells us a lot about the state of RusHydro's plant. In a way, it's a tribute to the ingenuity of Russia's engineers that so much of the Soviet-built capital stock is still in operation. Sayano-Sushchenskaya's plant should have been overhauled years ago - I visited it 10 years ago, and they were talking about the need for urgent repairs back then. But there was no capital refit or major investment program, and they have managed to keep the place going on whatever they could squeeze out of their owners, who were busying siphoning off either the cash flow or the energy. Krasnoyarsk is a pretty rough region, especially where electricity and the aluminium industry is concerned, but it's not spectacularly worse than other regions, and has been cleaned up a lot in the last five years. If things are bad there, you can bet that they are bad elsewhere. So this is another warning to the market to avoid capital intensive assets that have been in state or quasi-state ownership for a long time. Somewhere, buried deep inside them, is an accident waiting to happen.
I got some questions as to whether we should be buying aluminium or aluminium related stocks. The answer would have been yes, 18 months ago, but now there is such a glut of capacity in the sector all round the world, any shortfall in supply because of a lack of electricity in Russia will soon be met by other producers, especially since the cost of transport is low relative to what it was. And in any case RusAl should be able to make up the electricity deficit. Although this will create the one big buy opportunity from this accident, which is Kuzbasrazrezugol (KZRU), a major thermal coal miner in Kemerevo, next door to Krasnoyarsk. If demand now switches to coal-fired plants in the Krasnoyarsk region, then KZRU will benefit. And coal is hot right now, as the Chinese are shutting down old mines and buying from abroad. The other big beneficiary is Siloviye Mashiny, which makes the turbines that will have to be replaced. It is expected to get the contract from Sayano-Sushenskaya, and presumably others as well. But Siloviye has already jumped about 25%, and it's not very liquid. KZRU is up about 10%, but it's also illiquid, so it's not for us. But a retail investor can happily swim in these waters, although you need access to the Russian exchanges.
Otherwise accidents like this can be used to explain part of the Russia discount. They remind us that book values for many privatised companies are based on Soviet era asset valuations, with multipliers applied, which tends to amplify the over-valuation. If it's not new, or if it hasn't been in private ownership for 10 years, then you need to really question whether a company's assets are fit for purpose, and this is something that company management will never tell you the truth about. Another reason to avoid the electricity sector, in the long term.
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