The forecasted $27/t increase would add $1.50 to the 2008 EPS contribution of the just announced acquisition, assuming a 25% tax rate and assuming that MTL gets all of the increase. This is in addition to the base (2007) performance of the acquisition, which could be $1 or more accretive depending on margins, realized prices, and the interest rate on debt used for the $2.3B acquisition.
$27/t x 10MMtpy x 0.75 / 139 = $1.50
Upon further review, my $1.50 EPS increase for the new assets from expected coal price increase is too high, as almost half of the acquired mine's output is steam coal, which sells for 20-40% lower price. Also, MTL is only buying the 75% they do not own, so there is less than a dollar EPS benefit in 2008 from the acquired assets from the expected increase in coal prices, assuming MTL gets all of the increase. The most significant benefit of the acquisition appears to be on the reserve side; MTL is paying only about $1 for each tonne of reserves, or about a penny on the dollar in terms of sales price. Of course, billions of dollars will probably be required to develop these reserves.
However, the benefit of coal price increases on existing production should be substantial - over $2.50 in EPS assuming an average $23 per tonne price increase on output of over 20MM tpy.
$23 x 21.5MM x 0.75 / 139 = $2.70
Again, MTL may not get full international price, even though they own a large portion of their transportation network. OTOH, previous increases in world prices have may not yet completely worked their way through to MTL.
Mechel's coal output is now approaching 30 Mt/y following its recent takeover of Yakutugol and purchase of Russia's largest known, undeveloped high quality coking coal deposit. Author: John Chadwick
Posted: Tuesday , 09 Oct 2007
LONDON -
As the result of an auction held on October 5, 2007, Mechel acquired 75% less one share of Yakutugol OJSHC's charter capital and 68.86% of Elgaugol OAO's charter capital, for a total of RUR58.2 billion (approximately US$2.3 billion). Thus, Mechel's stake in Yakutugol increases to 100%, given that the company already held 25% plus one share in its ownership.
Yakutugol mines mainly coking coal with some steam coal output. Its total coal output is about 10 Mt/y (more than half Mechel's current output). The coal reserves of Yakutugol's existing assets are estimated at approximately 200 Mt, according to Russian reserve valuation standards. Yakutugol is the largest Russian exporter of coking coal and sells most of its output to countries in the Pacific region, including Japan, South Korea, and Taiwan.
Elgaugol holds the license for development of the Elga coal deposit with the total reserves of fat coking coals amounting to approximately 2,200 Mt. According to the experts' estimates, coal reserves in this region are 30,000 to 40,000 Mt. In addition, a real-estate complex owned by JSC Russian Railways was put up at the auction and acquired by Mechel. The complex includes the railway spur track from Zeisk station of the Far Eastern Railway to the Elga coal deposit and an access road from Zeisk station of the Far Eastern Railway to the Elga deposit.
Igor Zyuzin, Mechel's Chief Executive Officer, commented: "We are pleased with our victory at the auction. By acquiring Yakutugol, we have gained control over the last operating unprivatized coal asset, concluding a three-year privatization process. Although there had been some uncertainty among some investors that Mechel would obtain control over Yakutugol, we are glad that we proved our ability to bring all our undertakings to conclusion. Yakutugol will significantly strengthen Mechel's position on the Russian and international coking coal markets. Secondly, we obtained access to the largest deposit of high quality coking coals, which lays a reliable foundation for long term development of Mechel's coal mining. With ownership of Southern Kuzbass, Yakutugol, and Elgaugol, we hope to establish a world-class modern coal mining company. We plan to ship most of the mined coal to Russian consumers including Mechel's subsidiaries."
In 2006, Mechel produced approximately 17 Mt of coal comprising 9.7 Mt of coking coal and 7.3 Mt of steam coal.
