Daily analyst comments

Yesterday, an official spokesperson of Mechel Group (RTS: MTLR) said that the company is interested in lifting its stake in Yakutugol to a controlling interest (Mechel currently owns a blocking stake). However, the final decision on whether to bid in the tender will be adopted after the terms of the tender are officially announced. It was also reported that Mechel does not rule out acquisition of a stake in another Yakutia-based coal maker, Elgaugol.

For the record, the tender to sell a 39.4% stake in Elgaugol and 75% - 1 share in Yakutugol owned by the government of the Republic of Sakha (Yakutia) could be held prior to June 20. These stakes are to be auctioned off along with a 29.5% stake in Elgaugol owned by Russian Railroads Co. The stake owned by the regional government is to be contributed to the charter capital of SPV company established to privatize Yakutia-based coal assets. This company has already been formed, and Republic Investment Company (Yakutsk) and FSS have already registered a report on issuing common shares for a total of Rub 35.175 bln ($1.35 bln).

Yakutugol is a leading Russian supplier of coking coal concentrate to APR countries. The company engages in output of coking and power station coal using open pit and underground mining at the Neryungrinsky open-pit mine. Annual output is 9 mln tons. Elgaugol holds a coal production license for the north-western part of the Elginskoye deposit. Commissioning of the Elginskoye deposit will make it possible to ramp up annual output there to 30 mln tons of coal.

We believe these assets are appealing for Mechel. However, the main reason behind the group’s decision will be the price of these assets at the auction. Mechel management’s announcement could drive up stock valuations of its subsidiary South Kuzbass (RTS: UKUZ), since a 25% + 1 share in Yakutugol are listed on the balance sheet of this company. In the event that this equity position is upped to a controlling interest, South Kuzbass could become Russia’s largest coking coal producer.

At present, according to our estimates, South Kuzbass shares are fairly valued by the market. However, we do not rule out speculative investor interest in this stock in light of this development.