On July 17 ММК held a press conference to address its priority goals in upcoming years. Although the conference did not bring any surprises, some details of the company's strategy were disclosed. Its representatives highlighted the following priority goals:
To begin with, the company will keep its focus on the rapidly growing domestic market. The share of revenue gained by the company on the domestic market increased from 48% of the total in 2004 to 60% in 2007. The share grew further to 69% in 2Q 2008, and is projected at 67% in the full year.
Self-sufficiency in raw materials was another topic for discussion at the conference. The company said it met just 12% of its needs for iron ore by itself last year. The self-sufficiency in iron ore is to grow to 20% in 2008, and further to 30% next year. To achieve this goal, the company will develop its iron ore bases in Magnitogorsk and Bakal and scale up its metallurgical processing. However, the main emphasis will be put on the development of the Prioskolsky ore mining and processing works in the Belgorod region at a total cost of EUR 2-2.5 bn. The projected cost marginally outpaced our expectations, which were based on the previously disclosed targets of the investment program, under which MMK aimed to invest roughly USD 2.5 bn in its resource base before 2011. As before, MMK looks upon Belon as its strategic partner, meaning it does not plan to take it over. We believe that the position adopted by MMK enhances the likelihood of Belon holding an IPO in the autumn of 2008.
MMK representatives also touched upon the construction of steel-rolling mills. The company notably disclosed plans to start plate mills-5000 in Turkey and Russia. The total cost of these projects is estimated at USD 2.4 bn. Around USD 1.4 bn will be required to build a cold-rolling mill-2000, which will be used to make high-strength steel, not yet produced in Russia, for the automotive industry.
The steelmaker will give preference to long-term contracts. The company counts on the conclusion of a long-term deal with Mechel for coking coal supplies. Plans are underway to peg the contractual prices for core raw materials (iron ore and coking coal) to the relevant world prices, which hinge on the policy pursued by the world's biggest mining companies Vale, BHP and Rio Tinto.
We are upbeat about the company's plans and believe that the main goals voiced at the conference are indicative of the company's efficient strategy. Investors are advised to BUY MMK shares. Our target price for MMK is USD 1.65 per share, which implies an upside potential of 31%.
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