Bloomberg News

Raspadskaya Cuts Production Target 18% on Blast-Ravaged Mine

December 13, 2011

(Updates with share price in third-from-last paragraph.)

Dec. 9 (Bloomberg) -- OAO Raspadskaya, the coal producer part-owned by billionaire Roman Abramovich, lowered its output target for next year by 18 percent while working on restoring its flagship mine where blasts killed 90 miners last year.

“We plan to be able to produce 4.5 million tons of coal in the flagship mine next year, while the company’s output will be 10.5 million tons,” said Gennady Kozovoy, Raspadskaya’s chief executive officer and co-owner. He spoke in a Dec. 7 interview from Mezhdurechensk, Russia’s Kemerovo region, about 3,500 kilometers (2,200 miles) east of Moscow.

That compares with an estimated 1.4 million metric tons at the mine this year and 6.4 million tons companywide, he said.

A series of blasts ripped through the mine, also called Raspadskaya, in May last year, shutting down what was then the biggest source of coal for Russian steelmakers for about seven months. Some production resumed in December last year.

Kozovoy’s latest estimates signal a further reduction after Raspadskaya in October cut its 2011 output forecast by about 20 percent to 6.8 million tons because of delays at the damaged mine. According to a production forecast in February, the company targeted output of 12.8 million in total next year, including 6 million tons of coal at the flagship mine.

Underground Fire

While an underground fire is still burning on one of the mine’s eight levels, oxygen flow to the blaze has been cut off, Kozovoy said. “We now have 3,500 people working there, as before the accident,” he said.

“We have invested as much as $190 million so far in reconstruction of our main mine” and will invest $80 million more next year, Kozovoy said.

The site may produce as much as 7 million tons of coal in three years, Kozovoy said. That’s the volume the Raspadskaya mine operated at before the blast, Dmitry Smolin, an analyst at UralSib Capital, said by phone.

The fire is expected to burn up about 11 million of the mine’s 700 million tons of reserves, according to Kozovoy. The “strategic target” is to expand total company production to 17 million tons, he said.

Restoring operations is taking longer than expected partly due to “technological problems,” Kozovoy said. Safety and industry regulators are also delaying progress by withholding approvals while paperwork is processed, he said.

“We expected Raspadskaya to produce only 8 million tons in 2012, so their forecast is pretty positive, even if it is a downgrade,” Uralsib’s Smolin said.

Winning Back Markets

Raspadskaya exported its first coal since the accident in October. “Next year, we plan that exports will account for 30 percent of our sales, as was the case before the blast,” Kozovoy said.

Raspadskaya wants to regain lost customers in Ukraine, Kozovoy said. The miner is also in talks with buyers from Southeast Asia, he said.

The coal producer intends to spend about $200 million a year on maintenance and plans to expand further, depending on the market conditions, Kozovoy said.

Raspadskaya said last month it will buy back as much as $380 million of shares, or 10 percent of its issued capital, starting Dec. 19.

‘Fair Price’

Corber Enterprises Ltd., through which Kozovoy and his partners, including Abramovich, jointly control 80 percent of Raspadskaya, will participate in the buyback, he said. “We will decide in a year whether to cancel the repurchased stock or to sell it,” he said.

Evraz Plc, the steelmaker also partly owned by Abramovich, and Raspadskaya management were seeking to sell out of the coal mining company this year. They halted talks on the plan in October, citing market volatility.

Raspadskaya stock, which has dropped more than 50 percent so far this year and closed at 103.78 rubles ($3.30) in Moscow yesterday, is still undervalued by the market, Kozovoy said.

“We think that a fair price for Raspadskaya is not lower than $9 a share,” he said. That price would give the company a valuation of $7 billion, according to Bloomberg calculations.

Raspadskaya shares fell as much as 5.2 percent today, before narrowing losses to 0.5 percent and trading at 103.30 rubles at 4:52 p.m. in Moscow.

While discussions with buyers have stalled, they may be revived at the right price, Kozovoy said, adding that he agreed to remain Raspadskaya’s CEO “into the mid-term.”

Separately, the company is considering selling five-year Eurobonds in May 2012, Kozovoy said.

“We are talking to banks to arrange it,” he said. If a weak bond market prevents a sale, Raspadskaya may seek loans.

--With assistance from Ilya Khrennikov in Moscow. Editors: Torrey Clark, Tony Barrett

To contact the reporter on this story: Yuliya Fedorinova in Moscow at yfedorinova@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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