OREANDA-NEWS. February 18, 2010. Mechel announced that its Elga project is expected to deliver its first coal in 2H10. The company reported that it may produce 200kt of coal in 2010. The first phase of project will start in 2011 with an annual production target of 1-3mt of coal.  Over the long run (by 2020) Elga’s output could increase to 27-30mt annually, reported the press-centre of OTKRITIE Financial Corporation.

View: The Elga deposit contains both thermal and hard coking coal, though its coal possesses challenging enrichment characteristics. Industry sources suggest that production there will bear high costs. We believe that an FOB cost of US80-100t is likely. Nevertheless, we consider the announcement about the commencement of production is positive news for the company, showing Mechel’s ability to carry out its investment plans on schedule. 

According to the latest production plan, Mechel aims to deliver 29mt of raw coal in 2010. After the start of the Elga project, Mechel’s annual raw coal output in 2011-2012 may increase to 30-32mt. Coupled with higher capacity utilization at the Bluestone facilities, overall production will almost double by 2020. Mechel remains the most rapidly growing company in the sector.

Valuation and Action: We have a HOLD rating for Mechel, which trades on a 2010E EV/EBITDA of 7.5x (in line with EM steel and coal producers). However, we will revise our financial forecast on the back of recent market developments as we see substantial upside risks for Mechel's valuation.