Mechel wins more output and is fast becoming a worldclass coal producer

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 $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 unprivitized 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.