Research Notes

Last year, which saw a sharp rise in raw coal prices, breathed new life into the coal industry, as a result of which many companies substantially improved their financial and operating results. Mega profits enabled coal miners to inject cash into technical retooling, capital construction and new field development licenses. In light of the fact that coal prices have stabilized on the market at a level slightly below last year’s all-time high, we believe that investor interest in coal industry companies should remain buoyant.

• Russia is the world’s second largest country in terms of coal reserves, which account for over 17% of global reserves. Meanwhile, at the current pace of coal extraction the country’s coal needs should be met for the next 500 years.

• The aggregate capacity of the Russian coal market is about 260 mln tons, with 220 mln tons of this amount falling to coal recovered within Russian territory.

• Russia’s coal exports are rising at a fast pace thanks to the fact that domestic prices for both coking and thermal coal are 40-50% lower than global prices. Thus, the most attractive investment vehicles are export-oriented coal miners (Kuzbassrazrezugol and South Kuzbass).

• One should not disregard coal companies which target the domestic market. In view of gas tariff hikes on the domestic market, in the short term coal demand will grow, as a result of which good investment instruments are stocks of thermal coal producers, which manufacture both brown coal (Borodinskaya Mine and Berezovskaya-1 Mine) and black coal (Polysaevskaya Mine and Komsomolets Mine).

• It should also be noted that 60% of coal production is controlled by six entities: SUEC, Kuzbassrazrezugol, Yuzhkuzbassugol (controlled by Evraz), South Kuzbass (controlled by Mechel), Yakutugol (a blocking stake is held by Mechel) and Raspadskaya Mine (controlled by Evraz).

• Some companies, more precisely SUEC, Raspadskaya Mine and Yuzhkuzbassugol which have plans to go public in the near future, could benefit from the favorable climate on the coal market.

We performed a valuation of nine coal companies whose shares trade on the Russian stock market. In this research report we provide our valuations of Russian coal companies.

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Denis Gorev

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