Research Notes
Kuzbass Fuel Company: ambitious steam coal producer
| 22.07.10 |
We initiate coverage of Russia’s 7-th largest steam coal producer, Kuzbass Fuel Company (Russian acronym KTK). Since the early 2000s, the company has commissioned three new coal mines and has increased steam coal output from nearly zero to 6 mn tons per year, and plans to continue investing in both mining and enrichment capacities. Given KTK’s ambitious development strategy and highly experienced management team, we regard company shares as an optimum investment opportunity in Russian steam coal segment.
We assign a BUY rating for Kuzbass Fuel Company common shares with a 12-month target of USD 9.1.
Drivers:
Expected increase in mining operations. In line with the 2010-2015 development plan, KTK is to boost raw coal production from 6 to 11 mn tons, i.e. by nearly 80%, by bringing three coal production sites to the rated capacity. To attain this target, the company plans to invest some USD 150 mn in mining equipment over the next 5 years.
Rise in high-margin product sales. KTK plans to shift the sales pattern towards high-marginal sorted and enriched coal . In 2010-2012, the company is to commission new coal washeries with a total capacity of 8.5 mn tons. As a result, the share of dressed coal in the company’s sales should soar from 44% to 93% by 2015, which is to lend support to KTK margins.
Strong resource base. The overall resource base of KTK’s three coal production assets totals 0.4 bn tons. The mines’ operating life at the rated production capacity varies between 15 and 57 years. Resources may increase in the future as the mines are being tapped, and we do not expect the company to have any troubles with resource base in the foreseeable future.
Vertical integration. KTK is fully self-sufficient in electricity, a factor that should ease pressure on COGS as electricity tariffs go up. In addition, KTK has its own coal retail-sales network and a railway company. All of these factors help the company to stay less dependent on third-party service providers, and improve efficiency.
Key risks are related to factors beyond the company’s control:
Growth in natural monopolies’ tariffs is an essential risk for the company. This especially applies to railway rates, which now stand for nearly 50% of the definitive price for exported coal.
Transportation bottleneck. Another potential risk for KTK, which is set to boost exports to Asian markets, is limited railroad infrastructure and Far Eastern seaport capacities.
* 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.
Sectors: Metals, CoalCompany: OJSC "Kuzbasskaya Toplivnaya Company"