KIEV, Feb. 19 ??“ Ukraine??™s Industrial Union of Donbas is in talks with Gazmetall, a Russian iron ore producer, to create the largest producer of steel in the former Soviet Union, a newspaper reported Monday.

The merger between IUD and Gazmetall would create a company capable of producing up to 15 million metric tons of steel annually with capitalization worth up to $20 billion, industry analysts said.

Gazmetall and IUD have been holding merger talks for more than a month, Maksim Basov, the general manager at Gazmetall, said. ???Conclusions and recommendations will be submitted to shareholders within the next few months,??? Basov told Kommersant daily.

Shares in the Alchevsk Steel Mill, IUD??™s key steel asset, rose more than 12% within hours of trading at PFTS, the Ukrainian stock market, on Monday following the reports of the merger talks with Gazmetall.

The transaction would be the first massive cross-border merger of steel and mining assets between Russia and Ukraine and would create the No. 1 producer of steel in the former Soviet Union.

Analysts praised the possible deal as a strategic fit for both companies, as Gazmetal has excessive capacity of iron ore production, while IUD has been recently facing shortage of such raw material.

???The [to-be-created] company will be balanced out in terms of the raw material,??? Alexander Morozov, an analyst at UBS, said. ???Gazmetal has a surplus of [iron ore], while IUD has a shortage.???

IUD, which owns steelmaking assets in Ukraine, Poland and Hungary, is 50-50 owned by Serhiy Taruta and Vitaliy Hayduk.

Hayduk is currently holding the post of the secretary of the National Security and Defense Council, a body that advises President Viktor Yushchenko on strategic issues.

Gazmetall, which produces 40 million metric tons/year of iron ore, or up to 40% of Russia??™s overall output, is 50% owned by Alisher Usmanov, a Russian businessman linked with the Kremlin. Usmanov also owns Kommersant newspaper.

Usmanov has been persistently seeking to expand in Ukraine over the past 12 months. He held talks with Rinat Akhmetov, the wealthiest Ukrainian businessman, seeking to merge assets with Metinvest, Ukraine??™s largest privately held mining and steel group. The talks failed, however, as Metinvest had enough deposits of iron ore to support its steel operation.

Meanwhile, IUD has been recently going through some difficulties after two Ukrainian suppliers of iron ore had refused to sell the raw material to the company.

Smart Group and Privat Group, which own two major iron ore producers, have put pressure on IUD earlier this year by increasing prices. Eventually, this forced IUD to begin imports of iron ore from Brazil, while at the same time to start merger talks with Gazmetall.

Smart Group has previously often acted as a partner of Gazmetall in some of their joint Ukrainian projects. (nr/ez)