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Raspadskaya Coal Mining Stock: A Fire Sale Wrongly Treated as Trashing

The largest Russia’s public coal company, Raspadskaya (RASP:RU) has been under siege recently after reports about the owners of the Siberian hard fuel Klondike, Evraz Group (EVR: LI) has been seeking to sell their stake. On Thursday alone its stock has lost a whopping 6+%! However surprising the RASP’s current beneficiaries’ decision may look, especially for the bellwether second-tier stock has been favored by many domestic asset managers almost as much as notorious King of Electricity Inter RAO UES, it came as no surprise to us. In fact, Raspadskaya’s management has been struggling to keep up with uneasy task of quick recovery of the coal mines suffered massive collapses and flooding after notorious explosions on May 8 and 9, 2010. Russian PM Vladimir Putin at some point expressly stated his dissatisfaction with slow pace of the reconstruction hinting strongly at the company’s management incompetence and imminent large fines and penalties to be imposed soon.

A 80% stake that has been offered for sale is worth approximately $4.7 bn, and it is thought that only Novolipetsk Steel (NLMK:RU) is capable to pay this amount as a lump sum. In our opinion, although the risk of lacking creditworthy buyers runs high, there is little reason to talk about outright unattractiveness of Raspadskaya as a major Eurasian coal producing asset. In fact, Magnitogorsk Steel (MAGN:RU) has been long recognized as the only Russian steelmaker yearning for a sound resource base. Although the steelmaker already owns its own coal company Belon (BLNG:RU), its energy-intensive steel production clearly requires obtaining access to even more coal mines. On top of that, China, whose electric generation has been largely coal-based, has repeatedly expressed willingness to purchase some of Russia’s vast coking coal fields.

Russian steelmaking grade coal producers has increased domestic prices over February-March 2011 period by average 11% MoM in response to raising global energy prices and stronger import demand to Rub 4,500 ($156 EXW) per ton. Global benchmark coal prices in Q1 2011 has reached $225 per ton FOB (a 8% QoQ increase). Australian semisoft coking coal producers has also hiked their current contract prices by 26%. In particular, new Japanese export contracts featured $180 per ton price compared to $143 per ton in Q4 2010. Apparently, coal has been appreciating almost as rapidly as global crude while enjoying less stressful and more predictable pricing environment.

Being severely impacted by the 2010 explosions, Raspadskaya still produces as much as 7.2 mn tons annually. At the above coal price, its commercial inventories alone are estimated at $1.12 bn, and net assets account for $1.85 bn. The company recently announced $976 mn aimed for capital spending and $54.8 mn for maintenance through 2015. Its output should reach 18.5 mn tons in 2015.

On a comparative basis, Raspadskaya looks pretty reasonably priced in terms of P/E and 60% overvalued in terms of EV/EBITDA (see below table).
 

 

Ticker Name P/E ROE LF EV/EBITDA 2011E
  Median 39.87 16.25 9.96
RASP RM Equity RASPADSKAYA 15.39 27.98 13.58
MTLR RM Equity MECHEL 13.70 21.79 9.72
KZRU RU Equity KUZBASSRAZREZUGOL-BRD 89.13 23.89 4.45
BELO RM Equity BELON 16.57 16.32 5.63
Ticker                         Name            P/E         ROE LF        EV/EBITDA 2011E
 Median                                          39.87         16.25                    9.96
RASP RM Equity RASPADSKAYA 15.39          27.98                  13.58
MTLR RM Equity MECHEL            13.70          21.79                    9.72
KZRU RU Equity KUZBASSRAZREZUGOL 89.13 23.89                4.45
BELO RM Equity BELON               16.57          16.32                    5.63
Ticker Name P/E ROE LF EV/EBITDA 2011E
  Median 39.87 16.25 9.96
RASP RM Equity RASPADSKAYA 15.39 27.98 13.58
MTLR RM Equity MECHEL 13.70 21.79 9.72
KZRU RU Equity KUZBASSRAZREZUGOL-BRD 89.13 23.89 4.45
BELO RM Equity BELON 16.57 16.32 5.63
Ticker Name P/E ROE LF EV/EBITDA 2011E
  Median 39.87 16.25 9.96
RASP RM Equity RASPADSKAYA 15.39 27.98 13.58
MTLR RM Equity MECHEL 13.70 21.79 9.72
KZRU RU Equity KUZBASSRAZREZUGOL-BRD 89.13 23.89 4.45
BELO RM Equity BELON 16.57 16.32 5.63

 

Source: Bloomberg, Nord Capital calculations

Although Raspadskaya has been closely trailing overall performance of the Russia’s MICEX index (see chart below), on P/E basis it has been dramatically undervalued since the infamous May 2010 mine explosions mentioned above. The latter finding is particularly appealing once this key valuation indicator is compared against the Stowe Global Coal Index uniformly used as a benchmark for all global coal industry equities (see chart below):
 

Fig. 1 Comparative performance of RASP, MICEX and Stowe Global Coal indexes

Another striking fairy tale can be revealed while applying the most liquid coal ETF, KOL:US, benchmark against Raspadskaya. From technical analysis standpoint, this stock historically has been rather accurately following the benchmark’s trend, and no major catastrophe – let alone just a notable corporate event like notice of sale – caused the coal stock to get derailed from its trajectory.

Fig. 2 Comparative performance of RASP vs. largest coal ETF KOL:US

All above presented evidence suggests that at Rub 175 per common share ($6.10) – or at a particular buyout price announced by a first potential bidder such as Magnitogorsk Steel or Novolipetsk Steel (whichever, price decline or bid announcement, comes first) – Raspadskaya may present definite buying opportunity for a portfolio manager regardless of the company’s perished image or rather exaggerated fear of incapability to attract a decent new majority owner.