Research Notes

Vysochaishy's IPO: Investment Appeal Depends on Placement Price

Vysochaishy is to launch an IPO on February 1, 2007. Taking into account that investors are usually enthusiastic about flotations by gold producers, we can assume that the company's shares will enjoy demand. However, the flotation could be adversely impacted by the fact that another precious metal maker is scheduled to float its shares at the same time.

Vysochaishy plans to float via its subsidiary GV Gold 40-45% of its stock in the form of GDRs on the London Stock Exchange (LSE) and the remaining shares in RTS. It is expected that the placement price range will be announced and the order book will be closed on January 22, 2007. The IPO will kick off on February 1, 2007.

Vysochaishy's top management and BoD own over 90% of the company's stock, while Lenzoloto owns 7%. All existing shareholders will sell their shares during the IPO, while the three largest shareholders which currently hold 75% in the company plan to retain the controlling stake of 51%.

The company plans to allocate the IPO proceeds (according to the media, Vysochaishy is looking to raise around $200 mln) to expand its operations, boost output and exploration. In 2008, Vysochaishy plans to ramp up output to 4.2 mln tons of gold against the current figure of 2.7 tons and produce 5 tons in 2010. The construction and commissioning of a second GOK at deposits adjacent to the company's key field Golets Vysochaishy is believed to help achieve new output targets.

We believe that the timing of the IPO is quite good: gold prices are soaring on the global commodities markets and are not likely to retreat anytime soon, revenues of Russian gold mining companies are on the rise and COGS are quite low. Before, investors could reap benefits from booming Russian gold sector only through Polyus Gold's securities. After this IPO, investors will have an alternative and Vysochaishy will know how the market evaluates it. Vysochaishy's shares are likely to gain in liquidity and it will be easier for the company to draw loans on favorable terms, as a result of this flotation.

It should be noted that simultaneous placements of the two large companies from the same sector, Vysochaishy and PolyMetal, could depress investor demand.

According to our estimates, the value of Vysochaishy is in the range of $430 – 490 mln, or $86-98 per share.

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Nataly Kocheshkova

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Sector: Metals, Non-Ferrous Metals

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