Research Notes

World coal prices continued to grow in early February, as steam coal shipments from China and Australia declined. We do not expect the shipments to regain their previous levels in upcoming months, which mean the spot prices for coal should remain high in the future. The situation plays into the hand of Russian coal exporters, now well placed to boost their bottom lines, which is to give a boost to their shares. In our view, Southern Kuzbass, which exports roughly 40% of its total output, stands to gain the most from the current market conditions among all the Russian coal companies.

• The recent sharp hikes on coal prices, caused by problems with coal supplies from China and Australia, should allow Russian coal producers, and Southern Kuzbass, to raise their export coal prices, and boost their revenues.
• The company is implementing a large-scale investment program to expand production. The program is over USD 700 mn, which is to buy and upgrade production assets and buy new licenses. By 2010, the company plans to production to be 25 mn tons a year, a 25% jump on its current production levels. Production growth, driven by favorable market conditions, has a beneficial effect on the company's financial results.
• Southern Kuzbass shares may gain in value as Mechel consolidates all its coal mining assets on Southern Kuzbass books to possibly hold an IPO in the future. Even though Mechel has yet to disclose plans to develop its coal assets, Southern Kuzbass, Yakutugol and Elgaugol, we expect the company to consolidate all of its coal-mining assets onto the books of a single company, which would subsequently place part of its shares on a western stock market, possibly in Toronto. However, it is unlikely that the company would hold an IPO earlier than 2010 – the time needed to complete the consolidation process.

  We expect the current market trends to continue at least until the end of 2008, which would enable the company to achieve excellent financial results. We assign a Buy recommendation to the company’s shares.

  Denis Gorev

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  Sector: Metals, Coal
  Company: South Kuzbass
  
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