On August 22, it became known that Severstal had signed an agreement with PBS Coals’ majority shareholders for the acquisition of 71.5% of the company’s shares. Severstal will consolidate the complete share package in the US-based company after PBS Coals merges with Penford Capital Acquisition Corporation by taking over the latter. In line with Severstal’s estimates, the deal should be concluded by mid-September. The cost of acquisition with account for the company’s USD 40-60 million debt is USD 1.3 billion, or USD 7.93 per share.
PBS Coals’ reserves are estimated at 147 million tons of coal; the company operates 12 main production sites. In 2008, PBS produced 2.1 million tons of coking coal by means of underground mining and plans to raise its production volumes to 3.4 million tons in 2 years using the same method. Given the current volume of coal produced by means of surface mining, 1.2 million tons a year, by 2010, the total volume of coking coal produced by the company may equal 4.5 billion tons. Therefore, Severstal’s American subdivision will be fully provided with metallurgical coal.
Prior to Severstal, two groups of investors invested their funds in PBS Coals. In line with the preliminary estimates, these investors will gain more than 32% from the deal with Severstal, given they paid USD 6 per one PBS share within the private offering held on July 16, 2008. These investors are the above mentioned Penford Capital, and the Talbot Group who are involved in investments on the global coal market.
In line with media reports, PBS Coals’ EBITDA for FY 2007 amounted to USD 60-70 million, while for 2008 this value is projected at around USD 200 million. Therefore, the transaction’s EV/EBITDA ratio for FY 2008 should be nearly 6.5
We recommend that investors Buy Severstal shares with a target price of USD 25.6 per share and a 45% upside potential.
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