Research Notes

High coking coal prices allowed Raspadskaya to exhibit impressive growth in its financial performance in the first half of 2007. In view of the current market conditions in our valuation model we revised our forecast for coking coal and coking coal concentrate prices in the mid- and long-term outlook. As a result, Raspadskaya's stock price soared from $3.01 to $4.49, which implies 17% upside to the current stock valuations.

On September 25, 2007 Raspadskaya came out with its financial report for January-June 2007. According to the document, the company generated $90 mln in IAS net profit or 77% more than a year earlier, while sales rocketed 55% to $339 mln and EBITDA shot up 66% to $199 mln. These figures slightly outpaced our expectations.

In line with the coal miner's operating targets that were unveiled by its management team, this year Raspadskaya is looking to recover some 13 mln tons of coal which, if the favorable market environment sustains, is able to boost the company's earnings year-on-year.

Strong margins will enable the coal producer to generate higher cash flows with some resources to be allocated to the execution of a large-scale investment program (in H107 Raspadskaya spent some $64 mln on it).

Furthermore, the Raspadskaya-Yuzhkuzbassugol merger could also translate into an additional premium and it's not possible to find its exact amount right now, since the merger parameters still remain unknown.

By and large, we expect that the current market trends will prevail until at least the end of 2007, allowing Raspadskaya to report fairly strong financial results. Our recommendation on Raspadskaya shares is Buy.

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Denis Gorev

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