Steel . The flagship operation.

At the beginning of 1996, MiddleSex entered into a trading agreement with OEMK, one of the most modern and profitable steel mills in Russia, for the export of up to US$300m of steel products per annum. As trading was unfolding successfully, MiddleSex acquired a 7.9% interest in OEMK. Additionally, its 40 % owned investment vehicle, Interfin, holds another 6.6% of OEMK, which gives MiddleSex a further 2.6% indirect interest.

In august 1996, MiddleSex acquired DRI (IOM) Ltd. whose sole asset was the exclusive rights to export 40,000 metric tons per month (±10%) of thermally passivated direct reduced iron (DRI) pellets produced by OEMK. Direct iron reduction technology is becoming increasingly popular as it significantly improves composition, reduces impurity contents and consequently enhances steel quality. DRI pellets are used as replacement for scrap material n modern electric arc furnace steel mills. Hence, in addition to steel products, MiddleSex also controls the exports of OEMK’s DRI pellets. DRI trading is carried out through MiddleSex’s 100% owned subsidiary, Oskmet (DRI) Limited.

In late 1996, MiddleSex acquired WolffSteel Ltd., an established international steel trading business, with a world-wide distribution network of clients.

As a result, MiddleSex currently records steel profits from three sources: OEMK export contacts, DRI exports contacts and additional WolffSteel trading:

The OEMK-MiddleSex relationship extends beyond the trading agreement. MiddleSex monitors the day to day running of the mill, the company’s management spends considerable time at the mill while two OEMK representatives monitor steel trading in London on permanent basis. In addition, OEMK has a 20 % interest in MiddleSex’s financial services arm, Interfin. Overall, according to what I have observed, I believe that this relationship is very strong.

Due to increasing environmental concerns and the subsequent growth of the electric arc furnace (EAF) steel-making facilities, direct iron reduction technology is becoming more attractive. Originally, all DRI exports from OEMK were handled by DRI (IOM) Ltd. In August 1996 MiddleSex bought 100% of DRI Ltd. For a maximum consideration of 2.8m and inherited a ten year exclusive world wide distribution.

Since it gained the control over DRI exports, MiddleSex has managed to significantly expand the company’s customer base. Currently, OEMK’s DRI pellets feed steel mills in USA, Spain, Germany, Italy and Mexico.

According to my observation I believe that a vertical integration of MiddleSex’s steel activities is possible and would be highly beneficial for both partners. Assuming that MiddleSex takes an equity interest in Lebedinsky GOK, the raw material supplier (such as iron ore), and increases its equity interest in OEMK, MiddleSex would have an economic exposure to entire steel operation, from the raw material (Lebedisky), through the steel mill(OEMK) to trading (MiddleSex/WolffSteel)

Non-ferrous Metals

Aluminum was one of the original businesses which Masoud Alikhani injected into MiddleSex when he joined in 1993. The aluminum business was built upon Mr. Alikhani’s trading relationship with Tadaz, the third largest aluminum smelter in the world, located in Tajikistan. Historically, the relationship with Tadaz was that MiddleSex would supply the aluminum; it would pre-finance the processing and in return it would receive the aluminum which it would then sell in the international markets. The relationship worked profitably. However, throughout 1996, the political situation in Tajikistan deteriorated, trading cycles became longer and no deliveries were made in the last six months of 1996, leaving MiddleSex owned some US7.9m(£ 4.6m). MiddleSex believes it will recover this debt: it has already received US$2.4m(£ 1.5m) in late June 1997. Negotiations are well advanced to collect the balance.

During 1996 MiddleSex diversified its non-ferrous business into nickel. In October 1996 it entered into a short-term pilot contract with Napo Invest and Trade Corp., a company incorporated in the British Virgin Islands and run by Mr. Yuri Murkin, a business associate of Mr. Alikhani, and two Russian companies: Koks, which owns the Kemerovo coke plants and Kombinat Yuzhuralnikel, one of the biggest Russian nickel producers.

The government recently sold its 38% in troubled Norilsk Nickel, the biggest but also heavily debt-ridden Russian nickel producer. Following the Norilsk example, Yuzhuralnikel could be the next to be auctioned. Interfin, MiddleSex’s 40% owned investment, has already secured a 14.7% interest in the Yuzhuralnikel nickel plant, which gives MiddleSex a 5.9% indirect interest.

Overall I believe that MiddleSex is in strong position if it decodes to increase its interest in

Yuzhuralnikel and therefore its Yuzhuralnikel exposure to nickel. However, I have assumed that MiddleSex will only extend the trading with Yuzhuralnikel.

Financial Services

The backbone of MiddleSex’s financial services operations is the 40% owned Interfin (Interbank Investment and Finance Company). The remaining 60% is held by GAZPROM (20%), OEMK(20%) and Mapo Bank(20%). MiddleSex’s financial services include:

· trading in Russian capital markets;

· financial advise to western companies or potential business in Russia, and

· advice to Russian companies entering western capital markets.

Established in late 1994, Interfin commenced by trading in Russian treasury. Initial returns were good and Interfin quickly made substantial profits, which enabled the company to start buying stakes in various Russian companies. As a result, Interfin has built an impressive asset base of which the company estimated to be in excess of US$300m.