Research Notes

Recent high prices for rare metals in the world markets have lead to an increased demand for shares of companies involved with metal production. Among Russian companies of this sector, we specifically highlight Uralredmet, whose shares showed impressive results, but still have considerable potential. To gain a more in depth knowledge of the company's activities, we visited Uralredmet. We spoke with the company's management at the AGM, and obtained additional information on the company's activities and drew some conclusions on the undervaluation of the company's shares.

• The plant is focused on the production of vanadium-based alloys by applying an alumothermic reduction method for titanium alloys. The plant also makes vanadium ingots with a 99.5%-99.99% pureness through an arc-melting method. An abrupt rise in vanadium prices in 1Q 2008 should help the company to improve its financials both in 1Q and FY 2008.
• The company's financials demonstrated considerable growth in FY 2007. Revenue increased by 42% y-o-y to USD 91.3 mn. Uralredmet's EBITDA grew by 175% y-o-y to USD 21.2 mn. An upturn in the company's financials was backed by favorable conditions in the key markets for the company's core products. We expect further improvements for the company's financials in FY 2008 amid favorable market conditions.
• In a meeting with us, the general director denied the interest allegedly being displayed in Uralredmet by VSMPO AVISMA, its key customer, and added that another large-scale company recently showed interest in the company. We believe the company mentioned may be UGMK, which also has production units in Verkhnyaya Pyshma. We also believe that a scenario for the takeover of Uralredmet by the UGMK holding company could be more interesting since UGMK has highly-qualified personnel capable of streamlining Uralredmet operations, which could produce a beneficial synergy effect on the company's stock valuations.
• The company has excellent expectations for a new product – ferrotitanium. The company expects to produce nearly 2,000 tons a year, which is to add USD 15-20 mn to the company's revenue.

In line with our valuation based on market ratios, the value of Uralredmet's shares is nearly USD 133 per share, a 71% upside to the current average market price. We view the plant's shares as an attractive investment vehicle.

Denis Gorev

* Short overviews of equity research reports and sector reports are posted on the website http://www.finamrus.com with a 1-day delay after their full versions are emailed to the company’s clients. To get overviews on the day of their release, please contact your manager at Finam to sign up for full versions of research reports.